Market Outlook

At the Federal Open Market Committee (FOMC) meeting, Federal Reserve (Fed) Chair Powell reiterated a patient approach to policy changes given the bumpy path to lower inflation. Despite hopes for formal guidance regarding the Fed’s quantitative tightening program, Powell only mentioned tapering would begin “relatively soon.” As a result, key U.S. equity indices reached new highs last week, also supported by strong housing data. Both building permits and existing home sales showed continued acceleration. While positive for markets, increased housing activity could put upward pressure on inflation.

Interest rate volatility, as measured by the ICE BofAML MOVE Index, fell to its lowest level in two years. Furthermore, credit spreads in the Bloomberg High Yield Index fell to their lowest level since January 2022.

This week’s inflation data should provide further clarity on progress toward the Fed’s 2% target.

Chart of the Week

The Fed’s “dot plot” summary of economic projections showed three, 25-basis-point rate cuts in 2024.

Relative to the dot plot’s previous release in December 2023, rate expectations for 2025 are slightly more restrictive, likely because year-to-date inflation is proving difficult to tame.

Following last week’s FOMC meeting, the market now expects the first fed funds rate cut in June instead of May, which is in line with our view.

FOR AN IN-DEPTH LOOK
View Chart of the Week