July 2024 Fed Meeting Ends With The Fed Funds Rate Still At 5.25% to 5.50%, But Treasury Yields Move Sharply Lower

The Federal Reserve ended its July meeting by issuing a statement that adjusted its rate stance. Whereas the Fed had previously indicated that it was principally biased towards fighting inflation, its new statement indicates that there has been real progress towards its 2% target and that it is attentive to risks on both sides of the mandate (i.e., inflation and maximum employment).

The shift to a neutral stance was well projected by Chairman Jerome Powell and the others on the Federal Reserve. It was also well anticipated. Only about 3% of economists polled believed that the Fed would cut interest rates at this meeting, and between 97% and 100% believe that the first cut would come at the September meeting.

Even though the Federal Reserve projected well and did not cut rates now, the stock market has sold off dramatically and both yields have come down sharply.   Markets are acting oddly, as if the Fed sees that a recession is on the near horizon and that it will need to lower rates sharply and quickly. Treasury yields between 3 and 5 years have already fallen below 4% within 24 hours.

This panicked reaction would be odd, except for the fact that rates have hovered near 23 year highs for the better part of the last 16 months and the default mechanism for fighting recessions during that period has been to take short-term interest rates close to zero. We also have a Presidential candidate who seems to alternate between arguing that Powell has held rates too high (while insisting that if he lowers rates before November, he would be committing election interference).

But, we have been here before.  In January, yields came in sharply when economists believed that the Fed was about to cut, only to reverse and move to higher levels for most of the year.  My hunch therefore is that the Fed is going to move rates down very slowly and deliberately. It will only act as quickly as the yield curve is now indicating if we fall into a sharp recession.

Whether the Fed moves quickly or slowly, we have moved to a place where bank CDs are much more attractive than US Treasuries, even for those in the highest tax jurisdictions who can benefit from the tax-free attributes of the latter.

Now is a good time to compare CD rates here.

And, it is also a good time to be sure that your money is in the highest yielding online savings accounts.