September 26, 2023
The Federal Reserve left its policy rates unchanged at 5.25% - 5.5% last week, but signaled one more hike could be on the table this year. While the decision was largely expected by the market, the Fed’s updated dot plot, which demonstrates its projected path of interest rates, received a negative reaction. Following the FOMC meeting, both 2- and 10-year Treasury yields spiked to multiyear highs and equities sold off.
The Fed increased its 2024 estimate by 50 basis points (bps), implying the central bank expects two fewer rate cuts in 2024 instead of the 100 bps of easing previously projected. Meanwhile, the futures market continues to believe the Fed will remain on hold in 2023, with its year-end target of 5.5% largely left unchanged since July. While the market's forecast for 2024 is getting closer to the Fed’s – up 100 bps in the last two months – it expects two more cuts than the Fed.
Whether the Fed or the market’s view for 2024 is right will depend on whether today’s resilient economy can cool enough for inflation to move closer to the Fed’s 2% target. But for now, these shifting expectations of higher-for-longer rates could continue to put pressure on equities. While September has historically been a challenging period for stocks, investors are also weighing headlines surrounding a potential government shutdown, auto strikes and higher oil prices.
Although that could mean a bumpy ride for investors in the near term, we continue to remain constructive on equities. Therefore, any pullback could provide an opportunity for long-term investors who may be underinvested in stocks.
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