Rates remain steady as the Fed keeps its focus on inflation

In the first announcement of the year, the U.S. Federal Reserve (the Fed) announced it’s holding the target range for the federal funds rate at 5.25%-5.50% during the Federal Open Market Committee’s (FOMC) statement on January 31, 2024 Opens in a new window..

Recent indicators suggest economic activity has been expanding at a solid pace. Job gains remain strong and the unemployment rate remains low. However, although it has eased over the last year, inflation remains elevated. According to Bloomberg, as of December 31, 2023, the U.S. inflation rate was 3.4%.

When it comes to potential future rate cuts, the FOMC confirmed it will carefully assess incoming data along with the evolving outlook and the balance of risks. The Committee doesn’t expect to reduce the target range for the federal funds rate until there’s more confidence that inflation is moving sustainably towards the target rate of 2%.

Sandor Polgar, Portfolio Manager, Global Fixed Income at CIBC Asset Management says, “Today’s Fed rate announcement affirmed the current economic backdrop continues to show progress towards a balanced equilibrium. It also reinforced the narrative that continued greater confidence in sustained inflation is required before considering rate cuts. The FOMC acknowledged an uptick in its economic outlook as activity has been expanding at a solid pace — a positive change from the previous statement in December that noted slowing growth.”

“Another notable change from the previous statement was the removal of the FOMC’s comments about the resiliency of the U.S. banking system. This infers the regional banking crisis was specific to 2023 and no longer requires a comment in 2024,” says Polgar.

“The reaction thus far has been muted as markets digest today’s Fed statement.” He confirms, “Markets placed no probability of an interest rate decision today and no risk to further tightening by the central bank. The debate now shifts to when the Fed can begin normalizing interest rates.” Polgar confirms that current market expectations have the Fed starting to cut rates in the spring of this year and achieving a cumulation of 150 basis points (bps) of cuts by December 2024.

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