Fed expected to maintain highest interest rates in 22 years, potential rate cuts on horizon
The Federal Reserve is expected to uphold its current policy rate at its highest point in 22 years, following a two-day policy meeting set to conclude on Wednesday, September 20, 2023. This move will provide the central bank additional time to assess the impact of its rate increases as it continues its mission to reduce inflation to an annual target of 2%.
Jeffrey Roach, Chief Economist at LPL Financial (NASDAQ:LPLA), has suggested that discussions about potential rate reductions could commence a few months into 2024, assuming there are no significant changes this year. Roach underscored the importance of monitoring holiday sales, indicating that satisfactory results could lead to these discussions being slated for the second quarter of 2024.
Historically, stock markets have shown a tendency to surge following rate cuts by the Fed. However, this pattern was disrupted during the emergency cuts in March 2020 due to the COVID crisis. By September 2020, six months later, the S&P 500 had returned to record levels, buoyed by low rates and substantial pandemic stimulus amounting to trillions of dollars.
In June 2023, the central bank's "dot plot" predicted four 25-basis-point cuts to the existing policy range of 5.25% to 5.5% over the next year. This would bring the rate closer to an expected 3%. Wall Street analysts have been forecasting a similar trajectory for rates since September. The dot plots are updated quarterly and offer insight into central bankers' economic forecasts but are not definitive. The next dot update is scheduled for Wednesday.
Despite these forecasts, Roach warned that the dot plot has traditionally been an unreliable predictor of future rate movements.
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