Nearly two years after it began aggressively raising interest rates, the Federal Reserve has signaled that 2024 will be the year when investors get relief. In mid-December, markets cheered the Fed’s signals that it has finished raising rates this cycle and expects to begin cutting in the coming months.
Reflecting investors’ new expectations, 10-year Treasury yields pulled back during November and December. In late October, 10-year yields topped 5%, a clear signal that investors expected the Fed to continue boosting rates. However, as inflation has calmed and the job market has cooled, bond investors bid 10-year Treasury rates back down below 4% in December.
Fed policy has successfully slowed inflation. The pace of price hikes has eased from a year-over-year rate above 9% in mid-2022 to 3.1% in November 2023, according to the most recent consumer price index.
Following their mid-December policy meeting, Fed officials released projections of at least three rate cuts next year. While that news spurred a market rally, the joy soon turned to confusion. After all, the Fed’s inflation target remains at 2%, and inflation is a full point above that mark, meaning the Fed might not cut as aggressively as investors hope.
Fed officials haven’t ruled out higher rates. But Powell said that the sharp drop in inflation lets the central bank shift its focus to a new priority — not leaving rates too high for too long. The Fed’s benchmark federal-funds rate is in a range of 5.25% to 5.5%, its highest level in more than two decades.
“Inflation keeps coming down. The labor market keeps getting back into balance,” Powell said in his mid-December news conference. “And it’s so far so good, although we kind of assume that it will get harder from here, but so far it hasn’t.”
After Powell’s Dec. 13 press conference, markets began to anticipate that the Fed might cut rates beginning in March by a quarter point, followed by an additional five rate reductions after that, twice the number of rate cuts that Fed officials suggested. Before the meeting, markets anticipated no more than four cuts beginning around May.
Before investors get too excited about how many rate cuts are forthcoming in 2024, it’s worth noting that any Fed policy pivot is difficult to predict. Indeed, shortly after the Fed’s December meeting, Fed presidents began appearing on CNBC and elsewhere to rein in expectations of a rate cut in March.
In other words, it’s too soon for investors to breathe a sigh of relief. Markets are likely to remain chaotic and volatile. Uncertainty looms in other corners, too. Wars in Ukraine and the Middle East have introduced wild cards. Domestically, consumers and small businesses are challenged by lenders’ tighter credit policies, and regional banks face a looming crisis in the form of softening valuations of commercial real estate.
Another potentially destabilizing element is the contentious presidential election. Donald Trump, the frontrunner for the Republican nomination, has revived the tough trade talk that characterized his term in the Oval Office, threatening a 10% tariff on Chinese goods. While investors generally like Trump’s policies of lower taxes and less regulation, a new trade war could roil the economy and create headwinds for markets. (A caveat: The Real Asset Investor isn’t weighing in with a political position. We’re simply analyzing the situation from an investor’s perspective.)
For investors, the moment serves as a reminder that investing is full of risks. The ever-changing economic picture illustrates the reality of investing at the moment. Investors faced a period of intense uncertainty early in the pandemic. That was followed by a couple years of outsized returns. As markets return to something like normalcy, the new climate underscores the wisdom of our focus on high yield investment opportunities with best-in-class operators across a variety of asset classes. The Real Asset Investor raises capital from accredited investors to acquire assets for cash flow, equity growth, tax benefits and diversification, giving investors options outside of conventional financial markets.