By Rob Foss
Chief Investment Officer
EdgeRock

Last week, the Federal Reserve Board of Governors gathered again for its bimonthly meeting. Its members voted to leave the central bank’s target interest rate between 5.25 and 5.5 percent, which surprised no one closely tracking FED commentaries and FED fund futures. 

The questions asked of Chair Powell during his press conference continued to center around the future path of interest rates. With parts of the economy still experiencing sticky inflation, Powell reiterated the FED was prepared to sustain its elevated target rate until their preferred inflation measures read much closer to their 2.0 percent benchmark.

He also rightfully scoffed at the idea of stagflation and political interference in FED decisions.

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Macro policy: It’s for the birds

Whether you fall in the dove camp (those that believe rates should be lower) or in the hawk camp (those who believe rates should be higher), this press conference didn’t give anyone much to chew on. 

Powell’s dovish commentary—no foreseeable need for another hike—was well-counterbalanced by plenty of hawkish language, making it known that an extended, or even undefined, timeline for higher interest rates could continue to be appropriate. 

(One might also characterize this position as a normalization to historically common interest rate levels after being kept so low since The Great Recession in 2008.)

Continued higher interest rates make sense in our view. While inflation has cooled down considerably in many parts of the economy, it still isn’t at its target rate of 2.0 percent overall. The jobs market (unemployment rate & wage growth) has also cooled in recent months, but has also remained largely in good shape. 

What we read from this is that elevated interest rates have not yet done significant damage to the economy. But leading indicators suggest that can change at any time.

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The cracks beneath the surface

There is plenty of concern among pundits that the fight against inflation has stalled. Both CPI and the FED’s preferred PCE measure have flatlined in recent months after sustaining a consistent downward trend for all of 2023.

But other industry commentators have begun pointing to underlying measurements that are starting to buckle due to this restrictive policy stance.

Recent earnings reports and surveys of consumer spending have begun to signal lower socioeconomic tiers, at a minimum, are starting to spend more cautiously than they did a year ago. 

Companies in this sector still reporting strong earnings have been attributing strong promotional activity and/or loyalty program improvements, but it’s possible these efforts will only produce a temporary effect.

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So what does any of it mean, exactly?

While we can’t know exactly what FED governors are thinking, it is hard to imagine them not paying attention—at least at a surface level—to corporate earnings. 

If they’re seeing the same slowing of consumer spending that we are, it’s likely they view the current elevated interest rates working as intended, without any need for additional hikes, which could slow growth unnecessarily.  

So what does this mean for investors? The answer is probably not much. 

We believe in well-diversified allocations because we have seen success with this strategy over multiple market and economic cycles. If this response seems unsatisfactory, it’s because it’s our job to look past the reactionary language of the news cycle and keep our eyes fixed on the long-term investment goals of our clients.

We have begun to observe value stocks start to outperform growth. However, this slight outperformance has not given us enough cause to deviate from our core positioning at this time. EdgeRock will continue to ensure client accounts are appropriately positioned to address current market and macroeconomic conditions.