Fed officials expect three rate cuts this year, and markets are pre-popping champagne

Fed up… with high interest rates. Rate cuts are investors’ Roman Empire (always thinkin’ about ’em). Last week the Fed kept its federal-funds rate target untouched at a range of 5.25% to 5.5% (FYI: the highest level in 20+ years). The federal-funds rate — the rate at which banks borrow and lend extra cash to each other overnight to meet their legal reserve requirement — isn’t particularly sexy. But investors are obsessed with it. The Fed’s high rate has led to elevated interest rates on credit cards, bonds, mortgages, and savings accounts. It can also affect stocks.

• Rates are headed south: Despite this month’s hotter-than-expected inflation #s, last week most Fed officials maintained their forecast of three rate cuts this year.

• J. Powell conference > “Love is Blind” reunion: Investors dissected every word of the Fed Chair’s Wednesday speech, hoping to glean when cuts will come. J. Pow said the Fed still needs more proof of inflation’s continuing decline in order to start trimming.

• Hot cut summer? After last week’s comments from Fed officials, traders’ bets on a June rate cut rose to odds of 75%, up from 50%.

Why everyone’s talkin’ rates… Low rates (which make borrowing cheaper) tend to stimulate the economy and investment. High rates have the opposite effect, which is exactly what the Fed’s trying to achieve now to cool inflation. In March 2020, the US central bank slashed rates to near zero to juice a pandemic-stalled economy. That, plus trillions in gov’t stimulus, worked well — perhaps too well (see: sky-high inflation). Then the Fed started hiking rates in 2022, and US stocks fell into a bear market for most of that year. Markets don’t like high rates:

• When rates rise, so do potential returns from lower-risk investments (think: US gov’t bonds, savings accounts). That makes riskier investments like stocks less attractive in comparison, and investors demand higher stock returns to justify the shift.