Fed closes 2023 on hold
In its final policy meeting of the year, the Federal Reserve left the benchmark fed funds rate in its existing target range of 5.25%-5.5%, extending the pause that has been in effect since September:
Source (data): Federal Reserve. Values represent upper end of Fed funds target range. (For illustrative purposes. Not a recommendation.)
While the economy has slowed in recent months, inflation is still above the Fed’s 2% target level. On Tuesday, the Consumer Price Index (CPI) reading for November came in slightly higher than expected, highlighting the challenge of continuing to lower inflation, despite a significant decline from last year’s highs.
When the Fed raises rates, auto loans, credit card rates, and mortgages become more expensive, while companies pay more to borrow money. That can make both consumers and businesses more conservative about spending—which may then cool the economy and, hopefully, drive down the prices of goods and services. The Fed’s challenge is to accomplish this goal without tipping the economy into recession.
The Fed continues to stress the inflation battle isn’t over, and they don’t plan to lower their hawkish guard prematurely.
So far, this balancing act has been successful. But as the Fed itself has stressed, the battle to fully tame inflation is far from over, and they have no intention of lowering their hawkish guard prematurely. While the markets appear to have embraced the idea that rate cuts will happen sooner rather than later, the Fed has consistently pushed back against this narrative, and Morgan Stanley & Co. economists currently don’t anticipate a cut until the second half of 2024.1
As has been the case for more than a year, though, higher interest rates also offer investors meaningful fixed income yields. Maintaining a balanced portfolio of quality stocks (those with proven cash flow, and/or a record of consistently raising dividends) and fixed income investments should remain an attractive strategy for long-term investors.
Note: The Fed’s next policy meeting is scheduled for January 30-31.
1 MorganStanley.com. 2024 U.S. Economic Outlook. 11/17/23.