It is no secret that interest rates have been the main driving force for capital markets since inflation reared its ugly head in 2021. Since then, inflation has subsided significantly, though still far from the Fed's 2% target. The Fed funds rate is still holding at 5.25-5.50%, which is high considering the zero interest rate policy since the Great Financial Crisis. Therefore, all eyes are still focused on where interest rates are headed in the new year. Let's take a look.
Next FOMC On 31 January
The coming Federal Open Markets Committee meeting on 31 January 2024 is the nearest event that might change interest rates. Based on Fed Funds futures pricing, interest rate traders expect no changes to the Fed Funds rate. This was the status quo throughout 2023, so there should be no surprise here.
What About The Rest Of 2024
What is surprising is the Fed Funds rate path for the rest of 2024, according to interest rate traders.
The market expects the Fed to begin cutting interest rates in March and continually cutting for the rest of the year. This is despite the CPI for December 2023 coming in slightly hotter than expected. Contrast this to the Fed's dot plot, which is not as dovish. The Fed is only expecting three rate cuts for 2024.
Who Is Right about Interest Rates?
We do not know how things will turn out eventually, but there is a mismatch in market expectations with the Fed. The current narrative is that the Fed should cut interest rates because inflation has subsided and looks to be going down more. However, the Fed has only cut interest rates historically to fight a recession.
Given the strong labor market and consumer spending, it is hard to imagine an oncoming recession. Another possible catalyst for the Fed to cut rates is if there is a stock market crisis. This happened when the tech bubble burst in 2000, the Great Financial Crisis in 2008, and the COVID crisis in 2020.
So unless the market expects a crisis to happen in 2024, there is no impetus for the Fed to cut rates. If the Fed were to cut rates outside of a need-to basis, there is a real risk of spurring inflation again.
What Should An Investor Do?
The stock market did well in 2023, thanks to the AI theme and pandemic normalization. If you have benefitted from it, good for you, but do not get carried away. Stay focused on a sound investment approach that centers around building a well-diversified portfolio based on time-tested principles.
At AllQuant, our multi-strategy approach remains dynamic and continues to adapt to changes in the market environment, including interest rate changes, if any.
We will share more insights on how our advanced multi-strategy portfolio, as implemented by iFAST, can navigate 2024 in an upcoming breakfast-sharing session. Do register by clicking on the button below. See you there!
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