Fed signals rate cuts. What does that mean for your money?

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One expert suggests taking Fed guidance with a grain of salt

It turns out Wall Street was right. Stocks rallied last month on the growing belief that not only was the Federal Reserve done hiking interest rates, it would cut rates next year.

At the conclusion of the Fed’s December meeting, members of the Fed’s Open Market Committee (FMOC) released projections for 2024. Most penciled in three cuts in the federal funds rate, which determines interest rates on car loans, credit cards and banks’ prime lending rates.

Not surprisingly, stocks surged with the Dow Jones Industrial Average closing up 512 points, or 1.2%.

What it means

Here’s what that does to the investment environment:

  • Savers will likely get less interest on their money. Yields on Treasury bonds fell on the news.

  • Tech stocks, which led the November rally, gained even more.

  • Oil prices rose after finishing the previous day at their lowest level since June.

  • The price of gold, which had fallen over the last couple of weeks, posted a solid gain.

But it may be too soon for investors to make significant moves based on the Fed’s outlook. Oliver Rust, head of Product at Truflation, says the outlook is far from certain.

“With the labor market still running exceptionally hot and Truflation forecasting inflation will rise again in December, we expect policymakers will have to review their position and consider whether they need to increase rates again,” Rust told ConsumerAffairs.

There are still Fed ‘hawks’

“This would be a shock to the market, which is now overwhelmingly expecting the Fed’s next move to be an interest rate cut – though the majority now expect this to happen in May, rather than March. However, the market may be underestimating the extent of Fed Chair Jerome Powell’s hawkish stance.”

Rust also notes two of the incoming FOMC members next year also have hawkish views on monetary policy.

“This could further sway the committee toward another interest rate hike, should economic data suggest this is required,” he said. 

"In short, we are not seeing the economic slowdown required to bring inflation fully under control, which remains a core part of the Fed’s mandate. We expect Chairman Powell to remain firmly committed to this goal in 2024. If he does not see the necessary softening in the economic data in the new year, we believe he may still push for another 0.25% interest rate hike – and perhaps gain more support from his committee than he would have done this month.”

Generally, higher interest rates are a negative drag on stocks since they increase companies’ operating costs and can drag down profits.

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