The Federal Reserve today said it was not raising interest rates. Instead, the U.S. central bankers are waiting to see if their campaign of 11 interest rate hikes since March 2022 was enough to end the worst inflation cycle in over four decades. The Fed appears to be on the way to ending the high-inflation mentality that infiltrated the economy in 2021 and 2022 without causing a recession, winning a monetary policy battle that previous Fed regimes lost. In defiance of predictions by economists, central bankers have defeated inflation without tightening credit so much that it causes a recession -- two consecutive quarters of economic shrinkage. The Federal Open Market Committee, which regulated lending rates in the U.S., is comprised of 12 members: the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents. “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” according to the FOMC monetary policy statement released today. “In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5.25% to 5.5%. In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” The Fed funds rate, the lending rate the Fed charges the nation’s largest banks, hiked more than 1000% from March 2022. At its July 26, 2023, meeting, the FOMC raised rates, but the Committee, which meets every six weeks, declined to raise rates for a 12th time at its meeting on September 21 and again today. Economic growth has been stronger than expected all year long, fooling investors, and Fed algorithmic-driven forecasts indicate this dynamic is continuing in the final quarter of 2023. Economists surveyed in early October were predicting a growth rate of less than 1% for the fourth quarter of 2023 ending December 31; in comparison, the algorithm from the Atlanta Fed is projecting a 2.3% growth for the same, and the New York Fed’s nowcast is for GDP growth in the fourth quarter of 2.6%. “We remain committed to bringing inflation back down to our 2% goal and to keeping longer-term inflation expectations well anchored,” Fed chair Jerome Powell said at a press conference today explaining current monetary policy. “Reducing inflation is likely to require a period of below-potential growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.” Perhaps the Fed has gotten lucky or maybe it has improved its ability to manage inflation. It’s too soon to know. But what is known is that economic growth drives corporate earnings and earnings drive stock prices, and the prospects for growth amid a pause in interest rate hikes by the Fed is encouraging news for investors in diversified portfolios relying on U.S. stocks to drive performance. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances.
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