Crash or land: The Fed holds interest rates steady and Wall Street rejoices

Crash or land: The Fed holds tight and Wall Street rejoices

March 21, 2024 4:42 PM

Federal Reserve Chair Jerome Powell announced that interest rates would remain the same on March 20, 2024.

Welcome back to "Crash or Land," the column where Financial Planning checks up on the health of the U.S. economy. Whenever a key new data point emerges — whether it's a jobs report, inflation numbers or the latest move by the Fed — we ask wealth management's sharpest minds one question: Does it bring us closer to a recession or to a soft landing?

When it comes to interest rates, sometimes no news is good news. On Wednesday, the Federal Reserve announced that it was holding rates steady once again, keeping the federal funds rate between 5.25% and 5.5%. It also reiterated its plan to cut rates three times "at some point" this year, without specifying exactly when.

The upshot was clear: For now, the Fed is leaving everything exactly the same.

"We're in a situation where if we ease too much or too soon, we could see inflation come back," Fed Chair Jerome Powell said at a press conference on Wednesday. "If we ease too late, we could do unnecessary harm to employment."

But that was enough for Wall Street to celebrate. That afternoon, the S&P 500 rose 0.3%, the Dow Jones gained 0.4% and the Nasdaq climbed 0.5%.

For some investors, the fact that the Fed's outlook has not changed was encouraging in itself, given the economic data that's come out lately. Inflation has remained stubborn in recent months, with the consumer price index hovering around 3% from June through February — far lower than its 9.1% peak in 2022, but still not where the Fed wants it.

And earlier this month, an employment report came in hotter than expected, showing the U.S. economy added 275,000 jobs in February — not the kind of cooling economy that might justify slashing rates.

Nevertheless, Powell remained confident in the Fed's course.

"I think they [the recent inflation numbers] haven't really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%," he said. "I don't think that story has changed."

How should wealth managers look at the Fed's latest move, or lack thereof? Can clients still look forward to rate cuts later this year — and the expected boost to their portfolios? Or is inflation stuck at a level that won't allow the central bank to declare victory? Is the Fed simply waiting to make those cuts, or is it paralyzed?

For answers, we turned to some of wealth management's top analysts. Here's what they said:

All aboard

Gene Goldman, chief investment officer at

Cetera Financial Group

"I think the meeting, dot plot and press conference all suggest that the Fed is anticipating a so-called Goldilocks economy — they expect inflation to further slow, while the economy remains resilient. Hence they maintained their three rate cuts for 2024 and raised economic growth.

"We definitely agree. Despite the positive inflation bumps in January and February (don't forget we had two inflation misses during the prior two months), inflation is headed toward their long-term goals. We still haven't seen the effect of slowing rent in inflation. With asking rent marginally slower already, we know it is only a matter of time before this leading indicator slows rent. On the economic front, the economy remains resilient, and there are signs that areas in recession, like housing and manufacturing, are showing signs of stabilizing and even improving. Leading indicators such as building permits and manufacturing new orders suggest this. Taken together, we are all aboard the soft landing scenario."

Still on course for cuts

Brian Rose, senior U.S. economist at UBS Financial Services

"Our base case remains that the Fed will cut rates in June with a total of three cuts by the end of 2024. However, in line with Powell's comments, some softening of the inflation and labor data will likely be required for that to happen. Upcoming key data releases include PCE [personal consumption expenditures] inflation for February on March 29 and the labor report for March on April 5. With rates likely to move lower from here, we continue to anticipate an environment that will be favorable for quality stocks and bonds."

Confidence is key

Bret Kenwell, U.S. options investment analyst at

eToro

"The recent increase in inflation remains in focus. Is it just a bump in the road on the path to lower inflation or is it a meaningful increase that will require monetary policy to remain tight? If it's just a bump in the road, the U.S. economy appears set for a soft landing with the labor market remaining strong and economic growth remaining solid.

"However, the situation becomes more complicated if we see a deterioration in the labor market with little or no decrease in inflation. That said, the Fed doesn't seem likely to risk sending the economy into a recession just to get inflation back to its target range.

"The market craves certainty. When there's increased certainty, investors can move with more confidence. While the Fed didn't cut rates at the latest meeting, they reiterated an outlook for rate cuts this year. If that sparks confidence among fund managers, we could see stronger performance from small caps and bonds, as well as rate-sensitive sectors like utilities and real estate."

Bumpy road, right direction

Elyse Ausenbaugh, global investment strategist at JPMorgan Global Wealth Management

"The FOMC [Federal Open Market Committee]'s statement and Summary of Economic Projections acknowledge that the last mile of the disinflation journey might be bumpy, but that they think it will play out against a backdrop of multiple years of above-trend GDP growth and a resilient labor market.

"The upgrade to growth expectations paired with an inflation forecast that ticked up only for 2024 suggests that the Fed sees what we see in regards to productivity and supply-side dynamics — particularly in the labor market — playing a key role in laying the path to a soft landing.