Powell's Pivot: Dovish Fed Sees Rate Cuts in ‘24

Powell's Pivot: Dovish Fed Sees Rate Cuts in ‘24

January 04, 2024

Fed Chair Powell finally made his much-anticipated “pivot” at the close of the Fed’s two-day December meeting, saying he sees short-term rates heading lower next year. Perhaps much lower.

Surprised but excited, the financial markets rallied on the Fed’s policy pivot. But market watchers know the hard part comes next—how to position portfolios in a falling rate environment.

For much of 2023, the financial markets had anticipated the Fed would drop rates in 2024. The table below was from October 2023, when market watchers anticipated two rate cuts in 2024. But two weeks later, at its November meeting, Powell said the Fed had no interest in cutting rates anytime soon.

“The fact is, the committee is not thinking about rate cuts right now at all,” said Powell at the press conference in November.

So, what happened to “higher for longer?” What changed in six weeks? From the Fed’s perspective, a lot.

In the table below, take a look at some of the Fed’s 2024 projections and beyond. For Core Personal Consumption Expenditures, the Fed now sees it falling to 2.4% in 2024, down from 3.2% in 2023. The Fed also sees Fed Funds at 4.6% by the end of 2024. But that’s the median forecast. At least one Fed voting member sees 3.9%. So the Fed funds could be much lower than today’s rate of 5.25%-5.5%.

Judging from the Fed’s outlook, it appears that we are entering a transition period that will lead to lower rates. But nothing is certain until the Fed acts. If rates do start to trend lower next year, I will be evaluating portfolios to determine if any adjustments are needed for the new interest rate environment.

Enjoy the holiday season!