Investors hoping for more rate cuts were disappointed this week when the Federal Reserve announced they would remain steady through March. It came as markets across North America experienced their worst performance in the last four months.
But with markets rebounding after the news, let’s look at what investors should take away from the results.
Inflation still too high
Chairman Jerome Powell stated during the meeting this week that inflation remains higher than the Fed’s target. This would probably continue to keep interest rates high even through March. But how important is that first cut, really?
The probability that the cut will come in March led futures to decrease to a 36% probability in March, compared to 58% before the conference. With a May cut looking more likely, the probability rose to 60% from 51% before the announcement.
Investors took out gains as many expected that rate cut to come in March. Now, more are likely going to remain offside. And this wait-and-see approach could have even more impacts on the economy in the United States and, in turn, on Canada as well.
The timing of the announcement also came with a week of Big Tech earnings that basically needed to come in far higher than estimates if they hoped to keep their gains for 2024. So, even though the Magnificent Seven had incredible results, investors took the time to take their gains in the falling market.
A combination of Big Tech earnings, the announcement, and weakness from U.S. banks all led to a slide in shares. It seems that the big focus will remain on when rate cuts will happen, and Powell continues to be cagey on the subject.
The rally over the last four months came, as the market expected the Fed would start cutting in the new year. And an easier monetary policy would likely create a huge increase in equities. That’s because lower costs for companies and households lead to more cash on hand for investment and consumption.
What’s needed next?
Now, investors believe the rally may have gone too far, with the market getting ahead of itself. Even so, we’re headed in the right direction with falling inflation, sustained job growth, and economic growth as well.
So, really, investors need to at least hope for business as usual and for those inflation rates to come down and the economy to improve. While this isn’t likely to turn the March meeting into a rate cut, it does lead to more significance placed on the May meeting.
As for Canada, it looks unlikely that we’ll experience such a cut until summer — especially if the Fed isn’t going to decrease rates until May. So, what investors need to continue to hope for is that 2% inflation target by both the Fed and Bank of Canada.
While interest rates coming down is certainly something that investors need to pay attention to, it shouldn’t affect your overall strategy. In fact, you could use this time for lower share prices to get back into the market.
If you hope to do that, a strong option would be to invest in an S&P 500 exchange-traded fund, such as Vanguard S&P 500 Index ETF (TSX:VFV). This will allow you to buy up a portfolio of equities, tracking the market here in Canada. This has been proven to be one of the best methods of creating cash in the long term.
So, yes, we’re not out of the woods yet. But keep your eye on the prize, especially when it comes to your own financial goals.