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Digesting the Fed: Higher for Longer and Longer

Written by Joe Dunn | May 2, 2024 4:56:03 PM

The Federal Open Market Committee (FOMC) met this week and voted unanimously to hold rates steady for the sixth consecutive meeting, leaving its policy range at 5.25 percent to 5.5 percent. Futures markets had this expectation confidently priced in since mid-February, so the official decision comes as no surprise. This view is in stark contrast to market expectations at the start of 2024, when a second rate cut was fully priced in for this point in time. Yet even the first rate cut still eludes us.

Let’s look at what drove the committee’s decision at this meeting and what officials may be paying close attention to leading up to the June meeting.

Know When to Hold ‘Em

Inflation has established itself as a tough opponent for the Fed, with consumer prices remaining stickier than expected. While notable progress has been made since consumer price growth peaked in 2022, recent periods have raised potential concerns that the trend may not be as sustainable as once thought. This, in addition to ongoing strength in economic activity and the labor market, has given Fed Chair Jerome Powell and his colleagues room to step back and wait for more data to bolster their confidence in the path forward. Will recent data prove to be just a bump in the disinflationary road, or will inflation settle well above the stated 2 percent target? Time will tell, but rates remain unchanged for now.

Some Changes Are Afoot

While not as momentous of a change as raising or lowering rates, the Fed did communicate plans to slow the pace at which it is selling securities from its balance sheet. This could be characterized as a step toward slightly less restrictive policy, but Powell made it clear that he doesn’t view it that way. Rather, this shift has been a longstanding plan to get the Fed’s balance sheet back down to a reasonable level after it initially skyrocketed from pandemic-era accommodations. The change may result in a slightly less restrictive posture overall, but interest rates are by far the more active tool of monetary policy.

Bring Down the House (Prices)

Shelter costs are one of the largest contributors to inflation and have been a bit of a thorn in the Fed’s side. For months, data from private companies like Zillow have offered hope that housing prices are slowing and even coming down in some areas. While such data points are considered leading indicators and there is normally a lag before they show up in the federal government’s data, the length of the lag has been longer than expected. This has led some to question whether the relationship still holds, or whether there have been structural changes in the housing market that could lead to more persistent housing inflation moving forward.

If shelter costs do not moderate as expected, that could continue to fuel the “higher for longer” narrative. If shelter costs do moderate as expected, it could help us get one step closer to a rate cut. In the meantime, we’ll be waiting with bated breath to see how this situation develops.

Stay Tuned

Ultimately, the FOMC continues to lean on its meeting-to-meeting data dependency, so we’ll keep our eyes on incoming data and additional Fed commentary in the weeks ahead. We plan to continue these post-meeting blogs, so be sure to subscribe to The Independent Market Observer to stay up to date. The next FOMC meeting is scheduled for June 11–12, and we’ll be here to help you digest Fed developments as warmer weather approaches.