As expected, the Federal Reserve (Fed) paused its rate-hiking cycle at its latest meeting earlier this month after 15 consecutive months of tightening. The Federal Open Market Committee (FOMC) unanimously voted to keep interest rates unchanged at the current range of 5.0% to 5.25%, but also forecasted that it might need to raise rates again this year in order to continue to drive inflation down. In response to the COVID-19 pandemic, the Fed had cut interest rates to nearly zero percent in early 2020 to stimulate the economy and kept them at super-low levels for roughly two years. As inflation grew last year and eventually hit a 40-year high last in July, we saw the Fed aggressively raise interest rates in order to tamp down demand and reduce inflation. While the Fed’s efforts have caused inflation to steadily come down over the past year, inflation still remains above the long-term target of +2% annual growth.
Despite inflation still sitting above its long-term target, the Fed decided to pause now and let the impact of previous rate hikes flow through the economy before deciding whether to take more action or not. We know that there is a time lag before the full effect of an interest rate change is felt completely in the economy, so the total impact of the +5% increase in rates over the past 15 months is still building. Fed Chair Jerome Powell commented that no decision has been made yet whether to raise rates again at the July or September policy meetings, but we think it’s possible there will be 1-2 more increases this year unless changes in the economy or the inflation picture suggest otherwise, which is in-line with current market expectations.
Whether the Fed raises interest rates again this year or not, it’s clear that we are getting close to the end of this current tightening cycle. The sharp rise in interest rates over the past 15 months has impacted almost every type of lending rate and financial asset in one way or another, but there is reason to believe the Federal Reserve is set to begin a new phase for interest rates in the near future. Over the last 35 years, there have been five other monetary policy periods when the Fed paused after a major rate-hiking cycle, and it took anywhere from 4 to 15 months before the Fed started cutting rates. History provides us some comfort knowing that in the 12 months following an interest rate pause, on average, both stocks and bonds have delivered solid positive returns here in the United States.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.