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Inflation Reality Makes For More Of The Same Rate Scene

February 19, 2024

By Krista Biernbaum, CFP®, CIMA®
Investment Management Officer

In the final two months of 2023, both stock and bond prices rallied on expectations the Federal Reserve was done raising interest rates and will pivot to cuts in 2024. At the beginning of the year, the markets were pricing in seven 0.25%, or 25 basis points, cuts in the federal funds rate for 2024. This was an aggressive bet, as the Federal Reserve’s December interest rate projections showed just three cuts. Which leads to the question: Did the markets get ahead of themselves? The answer is yes.

Are the Markets Coming Back to Reality?

At the start of 2024, the bond market priced in over an 80% probability the Fed would pivot to rate cuts at its March policy meeting. Federal Reserve Chairman Jerome Powell pushed back on this at his press conference following the January policy meeting. Since then, market expectations shifted to more align with the Fed’s projections. As of Friday, the probability of a rate cut in March was less than 15%. Even the May meeting odds significantly declined to less than 30%. It is likely the Fed will leave rates higher for longer and not start reducing them until the summer months at the earliest. Why is this?

Inflation Holds Firm Supporting the Fed's Cautionary Stance

A key reason is inflation, one of the Fed’s dual mandates (the other is fostering full employment). Last week we received an update on the inflation front. First, the Consumer Price Index (CPI) showed prices rose 3.1% from a year ago in January and core CPI, excluding food and energy, rose 3.9%. Then, the January Producer Price Index (PPI) rose 0.9% on a year-over-year basis and core PPI rose 2%. All of these figures were above expectations. Stickier inflation bolsters the Fed’s case for leaving rates unchanged.

The Fed is in no rush to cut rates. Open Market Committee members want greater confidence inflation continues to move towards their 2% objective. This was reiterated in the Fed statement from its January meeting, in Powell’s press conference, and in Fed members’ comments since that policy meeting. All decision-makers are in agreement we will see rate cuts in 2024. The big unknowns are when, how often, and how much.

High Quality Bonds Remain Attractive

This shift in market expectations to better match the Fed’s less-bullish outlook pushed intermediate and longer term rates up from the levels of just a couple of months ago. This movement bolsters our conviction for high quality bonds in 2024 and beyond. Fixed income is back and now is the time to redeploy that cash into intermediate term bonds. You can lock in these still-attractive rates and guarantee that income stream for years to come. If you would like to discuss this in further detail, please reach out to your financial advisor today. Your financial success matters to us.

About the Author

Krista Biernbaum, CFP®, CIMA®

Krista Biernbaum is an Investment Management Officer within the Security National Wealth Management division. As an Investment Management Officer, she manages client portfolios, analyzes securities and performs daily trading activities. A Certified Financial Planner (CFP®) and Certified Investment Management Analyst (CIMA®), Krista holds a Bachelor of Science degree in mathematics from Wayne State College.

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