Weekly Market Update: April 1, 2024

The Federal Reserve held the federal funds rate at 5.25% to 5.50% during its March Federal Open Market Committee (FOMC) meeting. In his post-statement press conference, Chairman Jerome Powell said that the central bank is on track to begin cutting the benchmark short-term interest rate later this year. However, this move will depend on continued progress being made on reducing inflation, which did tick up during the first two months of this year, but overall remains on a downward trajectory.

The Treasury markets did not react much to the Fed news. In fact, the yield on the benchmark 10-year Treasury note traded in a tight band in the days following the Fed decision and slightly dovish commentary from Chairman Powell. That is because the economy continues to expand at a solid pace, buoyed by a tight labor market. Wall Street now thinks fewer than three interest-rate cuts are likely this year. On point, Atlanta Fed President Raphael Bostic recently said that a single rate reduction may be appropriate, citing persistent inflation and stronger-than-anticipated economic data.

The U.S. economy is expanding. The Fed raised its 2024 gross domestic product (GDP) forecast from 1.4% to 2.1%. The central bank seems to have managed its goal of allowing economic growth to continue, while gradually getting inflation under control. That said, the recent jump in commodities prices, particularly for oil, bears watching as it may put pressure on headline inflation figures.

The Federal Reserve is walking the inflation tightrope. Navigating a “soft landing” for the economy is not easy because high rates increase borrowing costs for businesses and consumers. The consumer has held up well in the higher inflation environment, but there are signs of spending fatigue as bills on past purchases financed at higher rates come due and credit delinquencies rise. The average interest rate on credit cards was nearly 23% in 2023.

Conclusion: A confluence of factors, including the possibility of the Fed loosening the monetary reins, a solid economy, and better corporate profit forecasts, are driving equities higher. Given this backdrop, we think a portfolio consisting primarily of high-quality stocks is prudent, especially with equity valuations looking extended. 

Source: ValueLine.com