Fed News

As expected, last week the Fed left the federal funds rate unchanged. Fed Chair Jerome Powell indicated that he didn’t expect circumstances to warrant a rate hike in the near future, but acknowledged that stalled progress on inflation could delay rate easing. Ideally, a resumption of disinflation would kickstart rate cuts, but a dovish stance could also arise because of negative economic news, such as a sudden weakening of the labor market. For now, markets are anticipating the first 25bp rate cut to occur this fall, with September a bit more likely than November.

In the medium term, markets have become much more skeptical about falling interest rates. Whereas earlier this year markets were galloping ahead of the Fed in projecting 6-7 rate cuts this year alone, they now are anticipating only 4-5 rate cuts by September of 2025. Markets may be concerned that inflation will continue to be persistently above target, or that the Fed will exercise considerable caution in bringing down the federal funds rate.

The Fed also announced that it is paring back its quantitative tightening program. It had been allowing $60 billion in Treasuries to mature each month without replacing them; that monthly amount has now been lowered to $25 billion. More money in the banking system should help ease monetary conditions a bit, and we have seen intermediate and long-term interest rates fall 10-15bp over the past week. Overall, though, we’re still playing a waiting game with respect to rates, as the Fed’s hoped-for dovish turn remains on hold so long as inflation remains high and the economy stays strong.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.