The Federal Reserve has spoken, and as expected, it paused interest rates…for now. At its September 20th FOMC meeting, the Fed made several noteworthy announcements that have the potential to impact your investment strategy. Let’s break down what happened and what it could mean for your financial future.
Fed Holds Rates Steady, Indicating One More Hike
As widely expected, the Fed opted to keep interest rates unchanged, maintaining the target range for the fed funds rate at 5.25%-5.50%. This decision fell in line with the market’s predictions, which had placed a high probability of the Fed not hiking rates at this meeting.
However, the real focus of the day was not just on the rate decision itself but on the Fed’s economic projections, often referred to as the “dot plot”. These projections offer a glimpse into the Fed’s expectations for future monetary policy. Per the economic projections, the Fed reiterated its outlook for a potential rate hike later this year, indicating a 0.25% increase in the fed funds rate by the end of 2023.
Higher Rates Than Previously Anticipated
What’s particularly noteworthy is the Fed’s revised expectations for interest rates in the coming years. The Fed’s forecast for the Fed funds rate at the end of 2024 has been revised upwards, suggesting a reduced likelihood of rate cuts compared to the current rate and even the Fed’s June outlook, three months ago. Additionally, the Fed adjusted its interest rate projections for 2025. This comes on the back of a more optimistic view of economic growth and a robust labor market. Interestingly, inflation expectations remained relatively unchanged.
In summary, the Fed appears confident that the economy is on track for a “soft” or “no landing” scenario, with inflation expected to gradually move towards its 2% target. Fed Chair Powell emphasized his unwavering commitment to steering inflation back to this goal. Consequently, the Fed is prepared to keep interest rates at elevated levels for an extended period to ensure this outcome.
Investment Outlook in a Changing Landscape
The Fed’s latest economic projections reinforce a broader shift in monetary policy, characterized by higher interest rates and quantitative tightening. This shift is a stark departure from the post-2008 era through the end of 2021.
So, what does this mean for investors? It’s time to recalibrate our expectations. While we aren’t bearish on the outlook for the stock market, it’s prudent to reset our return expectations to align with historical averages of mid-to-high single-digit annualized returns.
Core bonds are emerging as an attractive option, offering real income, lower volatility, and downside protection when compared to stocks. Bond yields have also become more appealing, with several Mission Wealth preferred bond funds delivering mid-to-high single-digit yields.
For those seeking additional diversification, alternative asset classes may offer upside potential, especially given the backdrop of moderating stock market returns. Many alternative fund strategies are targeting high single-digit, if not low double-digit, expected returns.
The Fed’s latest meeting underscores the need for investors to adapt to a changing financial landscape. Staying informed and working with a trusted wealth advisor can help you navigate these shifting tides and make well-informed decisions to secure your financial future.
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