U.S. Federal Reserve: Progress towards inflation target lacking, no change in the federal funds rate

Richard Schmidt

May 1, 2024

Key messages

The target for the federal funds rate remains at 5.25-to-5.5%
U.S. inflation has eased over the past year but remains elevated
The U.S. Federal Reserve will begin slowing the pace at which it’s reducing Treasury securities in June

The U.S. Federal Reserve (Fed) once again left the target for the federal funds rate unchanged at 5.25-to-5.5% on Wednesday and reiterated that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Similarly, the Fed confirmed that it will continue to reduce its holdings of Treasuries, agency debt and agency mortgage-backed securities. Starting in June, the pace of Treasury securities reduction will slow from US$60 billion to US$25 billion per month.

Economic Growth remains resilient as does inflation

Taken from the Fed’s latest statement, “recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”

This scenario is broadly in line with the Fed’s March projections. As a reminder, the Fed is expecting economic growth of 2.1% in 2024, 2.0% in 2025, 2.0% in 2026 and 1.8% longer term. Core inflation is expected to be 2.6% in 2024, 2.2% in 2025 and 2.0% in 2026.

Playing the rate cut waiting game

“In recent months, there has been a lack of further progress toward the [Federal Open Market] Committee's 2% inflation objective,” said the Fed in its statement. While most, including our team, still expect the Fed to begin easing monetary policy by cutting rates in the second half of the year, opinions on when and by how much are a bit more varied, ranging from three 0.25% cuts starting in the summer to one 0.25% cut happening right at the end of the year.

Since its March projections that suggested a gradual reduction in rates via three cuts totaling 0.75% this year, in 2025 and in 2026, the path the Fed will take has become less clear.

Scotia Global Asset Management’s Multi-Asset Management Team has shifted to a neutral equity

As we all wait for the Fed to make its move, we continue to exercise caution. The cumulative impact of higher rates is still very much playing out and red flags still exist suggesting an increased risk of recession.

In our portfolios that include a tactical asset allocation overlay, we have moved to a neutral equity position relative to fixed income and cash. The short-term acceleration in economic activity is countering our expectations for a more meaningful slowdown in the global economy. However, the aforementioned red flags are preventing us from moving to an overweight equity position. Inflation and concentrated markets remain the key risks to monitor.

Following the decline in bond yields at the end of 2023 and the expectation for lower rates in the near term, we reduced interest rate risk and positioned portfolios for a steeper yield curve (where the difference in yields between short- and long-term bonds is greater).

You can read more about our short- and long-term outlooks and how we position portfolios here.

For more information about this announcement or your portfolio, please contact your MD Advisor*.

The next Fed rate announcement is scheduled for June 12^th and will be accompanied by the latest Summary of Economic Projections.

Richard Schmidt

Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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