The Federal Open Market Committee (FOMC) acknowledged that economic activity is expanding at a solid pace, job gains remain strong and the unemployment rate remains low. However, although inflation has eased over the past year, it remains elevated. The ultimate goal is to achieve maximum employment, and have inflation reach the target rate of 2% over the long term. For this reason, the FOMC remains highly attentive to inflation risks.
Today’s statement signals the FOMC is looking for a gradual easing path for inflation over the next few years, says CIBC Capital Markets Opens in a new window.. Currently, the Fed expects 3 rate cuts this year, 4 in 2025 and 3 in 2026. This forecast may change, but the current outlook projects the federal funds rate will end 2026 slightly above 3%.
David Wong, Chief Investment Officer, Managing Director and Head, Total Investment Solutions at CIBC Asset Management says today’s rate announcement was in line with market expectations because the likelihood of a 25 basis point (bps) cut was only 1%.
Mr. Wong confirms, “the US equity market traded slightly higher while US and Canadian 10-year bond yields moved slightly lower. The US equity market has been on a steady ascent since the sentiment shifted away from rates staying higher for longer in late October 2023. Today’s announcement didn’t disrupt this trend.”
“We began 2024 with expectations for 7 rate cuts this year which fueled market optimism,” says Mr. Wong. “As these expectations declined in January and February, the market chose to focus on special cases of growth such as artificial intelligence.” He confirms that markets remain dynamic and the causes of recent strong performance can shift very quickly — as history has shown, so can market sentiment.
“This is yet another reminder about the dangers of binary investment approaches. We continue to have a meaningful strategic weight to diversified US equities because of long-term evidence with innovation and earnings growth.”
In the near term, uncertainty remains around the surprising resilience in the US economy under the current restrictive policy. While recent earnings growth and outlooks justify the current excitement surrounding many of the strong performers, the breadth of participation across industries remains modest. The FOMC’s sharp focus on inflation reiterates the need for continued multi-asset diversification within investment portfolios.
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