Investors keep hoping the Federal Reserve will cut its federal funds rate from its current target of 5.25% to 5.5%. And Jerome Powell and company keep disappointing the optimists.
The latest example came at the Fed’s Jan. 31 meeting. The Federal Open Markets Committee held steady on rates – and Powell, the Fed’s chairman, indicated there might not be a cut coming in March, either. Stocks, which had been soaring, fell on the news.
“Inflation has eased from its highs without a significant increase in unemployment,” Powell said. “That is very good news. But inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain. I want to assure the American people that we are fully committed to returning inflation to our 2% goal.”
The latest direction from the Fed means investors need to reset expectations. A year ago, nearly everyone expected that a heavily stimulated U.S. economy would lapse into recession in 2023. Instead, the economy burned off trillions in pandemic stimulus and kept motoring along. Gross domestic product grew at a strong 3.3% in the fourth quarter of 2024, the job market remains strong and consumer confidence is buoyant.
All of that means the Fed is reluctant to reverse course. The central bank had signaled that 2024 would be the year when investors get relief. In mid-December, markets cheered the Fed’s signals that it had finished raising rates this cycle and expects to begin cutting in the coming months.
Investors can be forgiven for thinking of the classic Tom Petty lyric: “The waiting is the hardest part.”
“Interest rates took the elevator going up but are going to take the stairs coming down,” said Greg McBride, chief financial analyst at Bankrate.com.
On the bright side, 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. However, in December, official inflation ticked up to 3.4%, a reading that no doubt played into Powell’s decision.
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation,” Powell said.
That means that for now, investors are stuck with a benchmark Fed rate that’s at its highest level in more than two decades. Seema Hah of Principal Asset Management doesn’t begrudge the decision.
“Inflation improvement has been considerable, but as long as the underlying economy is so robust, the risk of renewed inflation pressures cannot be ignored,” he said after the Fed’s latest meeting, according to Bloomberg.
The Fed’s head fakes, and markets’ frenzied responses, show that it’s never safe 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.
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.
