What to Watch as Fed Keeps Up Inflation Fight

Rates should continue to fall in 2024. [Turn Your Images On] [What to Watch as Fed Keeps Up Inflation Fight]( [Turn Your Images On] [Michael Carr]( Chief Market Technician We’re all led to believe that the Federal Reserve sets interest rates. However, that’s only partly true. The Fed sets what’s called the federal funds rate in a very specialized market. This is the interest rate that banks use to lend reserve balances to other banks overnight. Reserve balances are amounts held at the Fed. The central bank sets minimum capital requirements for banks, which ensures potential borrowers have enough cash to meet depositor demand. During the COVID-19 pandemic, the Fed set reserve requirements to zero. Prior to that, they were 3% to 10% of deposits based on the bank’s size. Even though reserves are zero right now, banks are still required to maintain enough cash to meet demand for a 30-day period. Fed funds help banks meet this requirement. At first glance, this specific rate may not seem important to us as consumers. But keep in mind that other rates are often tied to it. Banks use it as a benchmark for determining how much they charge on various loans. That doesn’t mean consumer loans will precisely track fed funds. Banks can add a premium to loans when risks are high or set rates lower when they believe that’s warranted. So in reality, fed funds may be the least important rate for consumers even though it attracts the most attention. Less followed but of significant importance is the rate on 10-year Treasury notes. And this one boils down to traders in the bond market. --------------------------------------------------------------- [Turn Your Images On]( [AI Predicts No. 1 Stock to Own]( New AI-powered stock rating system — that isolates stocks with the highest probability of producing the biggest gains — just released details on the top-rated stocks... [Details here…]( --------------------------------------------------------------- The Bond Market Will Be in Charge James Carville, a political strategist for former President Bill Clinton, learned how important the bond market is when his boss entered the White House. Carville stated: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.” His comment reflects the reality that bond markets, by setting interest rates, can influence national economies and government policies. Right now, the 10-year is delivering good news for policymakers and consumers. Rates are at about 4%. That’s a big drop from October’s 5% yields. Rates should continue to fall in 2024 as inflation cools. Ever since it started raising the benchmark rate, the Fed has made it clear that it’s serious about fighting inflation. And the central bank is still taking that fight seriously. New York Fed President John Williams confirmed that [in an interview with CNBC]( last week. When asked about potential rate cuts, he answered:"We aren't really talking about rate cuts right now. I just think it's just premature to be even thinking about that.” This means short-term rates are unlikely to change in the first few months of the year. However, Fed [official projections]( show a high likelihood of three rate cuts by the end of 2024. So we should expect several cuts, most likely in the second half of next year. Longer-term rates could continue lower. One reason for that is inflation as well. Inflation Expectations & Interest Rates After living with high inflation for more than a year, consumers now [expect it]( to remain low. That’s important because inflation expectations are a major factor in determining where to set interest rates. Right now, we have low inflation expectations when seasonal factors favor lower rates. But there’s another market-moving event that affects those expectations… It’s an election year. The Fed’s credibility is tied to its independence. If Fed Chair Jerome Powell and his team take actions that investors believe are designed to influence an election, the Fed will lose credibility. If that happens, inflation expectations will rise. We know the Fed works hard to maintain its credibility. So it’s likely that Powell and his crew will make only minimal changes to its benchmark rate before the election. What does that mean for us as investors in 2024? Carville’s dreaded bond market will be in charge. The recent drop in rates shows that the bond market is optimistic about the future. That’s likely to continue, at least until we know who wins next year’s race for the White House. Until next time, [Michael Carr]( Chief Market Technician, Money & Markets --------------------------------------------------------------- Check Out More From Stock Power Daily: - [THANKS, COSTCO! THIS GOLD RALLY IS DIFFERENT]( - [FED’S RATE DECISION LOOKS GOOD FOR THESE STOCKS]( - [1 WORD FOR COP28’S MASSIVE ENERGY DEAL]( --------------------------------------------------------------- [Turn Your Images On]( Privacy Policy The Money & Markets, P.O. Box 8378, Delray Beach, FL 33482. To ensure that you receive future issues of Money & Markets, please add info@mb.moneyandmarkets.com to your address book or [whitelist]( within your spam settings. For customer service questions or issues, please contact us for assistance. The mailbox associated with this email address is not monitored, so please do not reply. Your feedback is very important to us so if you would like to contact us with a question or comment, please click here: [( Legal Notice: This work is based on what we've learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It's your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments carry large potential rewards but also large potential risk. Don't trade in these markets with money you can't afford to lose. Money & Markets permits editors of a publication to recommend a security to subscribers that they own themselves. However, in no circumstance may an editor sell a security before our subscribers have a fair opportunity to exit. Any exit after a buy recommendation is made and prior to issuing a sell notification is forbidden. The length of time an editor must wait after subscribers have been advised to exit a play depends on the type of publication. (c) 2023 Money & Markets, LLC. All Rights Reserved. Protected by copyright laws of the United States and treaties. This Newsletter may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Money & Markets. P.O. Box 8378, Delray Beach, FL 33482. (TEL: 800-684-8471) Remove your email from this list: [Click here to Unsubscribe](