The Federal Reserve meets 8 times a year to discuss raising, lowering, or keeping interest rates the same. The meeting is over two days, the first being a broader discussion by the Fed Committee, which continues into the next day, and the announcement comes on the second day at approximately 11 am PT. The 2024 meeting dates are January 30-31, March 19-20, April/May 30-1, June 11-12, July 30-31, September 17-18, November 6-7, and December 17-18. The decision on January 31 was to leave interest rates unchanged.
The Fed, America’s central bank, steers the economy through monetary policy. This involves influencing short-term interest rates, which impacts borrowing costs. The Fed’s board sets targets, then uses tools like buying or selling bonds to adjust money supply and influence long-term rates. This balancing act aims to foster stable prices (low inflation) and maximum employment.
Two interesting charts to note below are the time periods of 1980 to 1982 and 2021 to 2023.
This first chart illustrates a time period of rapid inflation and Paul Volker, the Fed chairman at that time, was aggressively raising interest rates to fight off inflation. You can see the stock market went down for nearly 18 months and then began its recovery, approximately 2 years until it came back. If you lived through this time period, you would remember double digit mortgage rates if you were buying a house and treasury bonds were paying nearly 14%!
This second chart represents 2021 to 2023. Our Fed chairman, Jerome Powell, raised interest rates aggressively to combat rapid inflation stemming from a period of historically low interest rates and the COVID era. You can also see that the stock market went down for nearly 18 months, and then began its recovery, back to break even near the 2-year mark.
Over the last 2 years, we’ve been communicating this message in our meetings because these cycles usually repeat – not always exactly – but tend to have similarities. It was a great time to add to stocks where appropriate and buy bonds that are paying higher interest rates. Having a plan in both good and bad markets can lead to a more satisfying and secure retirement.
Now that the December inflation numbers are in, the picture looks even better. The Fed looks most closely at the ‘core personal consumption expenditures’ price index, which tracks what households are actually spending, and by that measure, the inflation rate is running at 2.9%.
The more widely followed Consumer Price Index (CPI) came in at a 3.4% inflation rate for all of 2023.
How does that compare to other commonly discussed interest rate gauges? The 30-year mortgage rate in the United States averaged 7.73% from 1971 until 2024, reaching an all-time high of 18.63% in October of 1981 and a record low of 2.65% in January of 2021. Currently, mortgage rates are in the 7% range. Checking and savings accounts are paying interest again, and the 10-year treasury bond is at 4.3% as of writing this article, aligning with a more traditional historical average going back to 1963, hitting a high of 13.92% in 1981 and a low of 0.89% in 2020. Overall, the economy seems to be in a more traditional interest rate landscape.
Remember the Fed’s goal is 2% inflation, so the work is not done yet. The most recent January CPI came in at 0.3% vs. the expected 0.2% for month-over-month inflation. A small difference of just 0.1%. However, if this were to continue, inflation would be increasing again, and the Fed would consider raising rates, which would dampen recent hopes of the stock market to lower rates. For now, it appears that inflation is no longer wildly out of control and the Fed will be sensitive to monthly data to make its decisions. Here’s a link to our inflation blog from last year, as well as many other blogs on our website about retirement planning.
Sources:
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/