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Where do we go from here? It is anyone’s guess. The Fed’s dot plot suggests there could be three to five rate cuts during 2024, but officials have also said they aren’t really talking rate cuts yet. It is fairly safe to assume there will not be any more rate hikes, but that is also not set in stone. If inflation should do an abrupt 180-degree turn, anything is possible. We have also been led to believe the Fed has changed its mind and may not wait until inflation reaches the central banks’ target of 2%, but rather make a move preemptively so as not to overshoot its mark (again).
Whether the market is ahead of the Fed by betting on rate relief or the Fed is trying to back-pedal in case it needs to change strategy remains to be seen. The stock and bond rally following the FOMC meeting this month has not been swayed by Fed officials dismissing the possibility of rate cuts. But for those of us who have been around for a while, bond and stock prices can’t stay up for long without some proof. The market, and the Fed, will need to see firm proof that inflation has stabilized. The PCE year-over-year inflation rate is at 2.6% currently, down from 7.1% last year. Any substantial upward variation in the rate could cause the Fed to stay firm for longer.
The Fed is walking a fine line between helping the consumer with lower rates and re-igniting the economy. One clear example is the housing market. As talk of lower rates trickles into the psychology of consumers and the economy, housing activity should pick up. Along with that comes all the secondary purchases needed for a new home, which could spur prices higher due to demand.
Another issue facing the Fed is that 2024 is an election year. Many economists suggest the Fed may be swayed to keep rates low regardless of inflation. History shows us that low rates during an election are not a given. Since 1955, rates have increased 10 times during an election year and fallen seven times. Powell and company will hopefully make their decision based on data, not politics.
Key Indicators this Week
Housing – High interest rates slowed home buying in 2023 for two reasons. First, the cost of a mortgage increased substantially this year, roughly $400 per month on a $400,000 home. With mortgage rates near or above 7% for much of the year, people were naturally reluctant to give up a 3% mortgage rate to move. Second, the supply of homes for sale today is 38% below pre-pandemic levels. Low inventory coupled with growing demand from millennials is pushing prices higher. The median home price for a previously owned home is up 4% from a year ago. New homes are trying to fill the void for buyers, with supply currently at the highest level in a year and prices 6% lower. Homebuilder sentiment improved in December for the first time in five months as buyer traffic improved.
I would like to take this time to say thank you for your support and continued reading of the weekly reports this year. Here’s to more liquidity, a stable economy and strong member support in the coming year – as well as good health and happiness for you and your family. On to 2024!
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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