US interest rates stay on hold – but equity investors get excited

What’s just happened?

US share markets made further gains last night with the US S&P500 benchmark finishing 0.9% higher, while the technology-focussed NASDAQ ?closed up 1.3%. Both have climbed just over 10% so far this year.

US two-year Treasury yields fell by 0.07% to 4.62% (bond prices rise when yields fall.)

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Why?

The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) yesterday voted unanimously to keep interest rates unchanged at the range of 5.25% - 5.50%, a 23-year high. This was in line with market expectations.

The Fed’s policy statement was broadly unchanged from that issued after its January meeting. This gave investors confidence that inflation is still expected to slow sufficiently to allow interest rates to begin falling from the middle of this year.

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What does this mean for investors?

There was little indication that there had been a significant shift in the Fed’s expectations of its interest rate trajectory.

Perhaps more interesting was its forecast that:

1. The US economy will expand? by 2.1% in 2024, up from its December forecast of 1.4%
2. Core inflation will be running at 2.6% by year-end, above the 2.4% expected in December
3. Unemployment will rise to 4.0%, below the? December forecast of 4.1%

These predictions appear to be consistent with expectations of a soft landing in the US economy, hence the positive reaction of equity markets.

This suggests that the path back down for interest rates will be rather more gentle than the steep climb up that we saw after inflation soared following the pandemic.

While rate cuts remain on the table for later this year, the strength of the US economy leaves the Fed in little hurry and will be sensitive to the ongoing inflation data.

This means equity investors should continue to focus on quality companies able to grow earnings in any interest rate environment.

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