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The Possibility of Interest Rate Cuts in 2024
Without a crystal ball, it’s impossible to know if the Federal Reserve will implement interest rate cuts in 2024. Data, however, is a powerful indicator, and its current indication is positive.
This week, we discuss capital markets, the economy, inflationary trends, and the possibility of the Fed implementing rate cuts by the end of the year.
The Disinflationary Trend
During the pandemic, inflation was over 9%. After steadily declining last year, it crept higher again in Q1 2024.
However, from April – June 2024, disinflation continued, and recent data places the Consumer Price Index (CPI) in the low 3% range.
While we have not reached the Federal Reserve’s inflationary mandate of 2%, we are making progress, and the CPI data is a positive indicator of the lagged impact of the Fed’s actions to lower inflation.
The Fed + Interest Rate Cuts
This disinflationary trend means the Fed will likely ease monetary policy. The market expects interest rate cuts later this year, pricing in an almost 100% probability of a cut in September and anticipating a second rate cut in November or December.
Cutting interest rates is a part of the Fed’s plan to lower inflation, but it can also be a picture of a slowing economy. A slowing economy may seem alarming, but it’s an intentional shift. Instead of slamming the breaks, the Fed is easing down to slow economic growth.
Employment data, for example, has waned. For every open job, there are roughly 1.2 available workers, which is back to pre-pandemic levels. Again, it’s important to remember that this slowdown moves the economy in the right direction.
How Credent is Positioned for the Rest of 2024
At Credent, we keep up with inflationary data and position our portfolios to prevent an excessive risk profile from taking hold.
In equities, we’re finding the most value in domestic large caps with a growth factor weighting. This positioning has worked year to date and looks promising going forward.
At the beginning of 2024, some investors considered moving to bonds to capture a 5.5% or 6% annualized yield on investments. We opposed this course of action and now see that equity portfolio returns at Credent have more than doubled the expected return profile of yields.
We still believe that equity market participation over the next 12 months, when executed methodically and with a risk-centric approach, stands to benefit investors.
If you’d like to talk to an advisor about the future of inflation and interest rates, reach out using the form below.