Why Are Rates Still High
You may be wondering why the Fed is maintaining higher interest rates. While some may argue that it’s necessary from combat inflation, there is no doubt it is creating uncertainty in the fixed and equity markets that had anticipated falling rates.
Questions remain when the Fed will ease monetary policy. Bottom line is if inflation does not come down rates won't either. Watch for the inflation clues as well as unemployment reports; these are the key data points.
A recent CNBC article highlights the increasing national debt and fiscal deficits that could influence the effectiveness of monetary policy in the future.
An excerpt is provided below.
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“”When rates start climbing higher, there has to be an adjustment,” said Quincy Krosby, chief global strategist at LPL Financial. “The calculus has changed. So the question is, are we going to have issues if rates remain higher for longer?”
The higher-for-longer stance was not what investors were expecting at the beginning of 2024, but it’s what they have to deal with now as inflation has proven stickier than expected, hovering around 3% compared with the Federal Reserve’s 2% target.
Recent statements by Fed Chair Jerome Powell and other policymakers have cemented the notion that rate cuts aren’t coming in the next several months. In fact, there even has been talk about the potential for an additional hike or two ahead if inflation doesn’t ease further.
That leaves big questions over when exactly monetary policy easing will come, and what the central bank’s position to remain on hold will do to both financial markets and the broader economy.
Krosby said some of those answers will come soon as the current earnings season heats up. Corporate officers will provide key details beyond sales and profits, including the impact that interest rates are having on profit margins and consumer behavior.
“If there’s any sense that companies have to start cutting back costs and that leads to labor market trouble, this is the path of a potential problem with rates this high,” Krosby said.
But financial markets, despite a recent 5.5% sell-off for the S&P 500, have largely held up amid the higher-rate landscape. The broad market, large-cap index is still up 6.3% year to date in the face of a Fed on hold, and 23% above the late October 2023 low.”
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