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.

The Federal Reserve has finished its June 2024 meeting, leaving interest rates at a 5.25% to 5.50% target.

While recent CPI numbers show that the pace of inflation has declined, the Fed is concerned that more progress needs to indicate a sustained move towards its 2% target.

The Fed's decision to leave rates at current levels is guided by the fact that we have had a soft landing in the economy. While the labor market may be cooling, it isn't contracting. And, there are certainly areas of the economy that are not doing well, but many areas are booming. Since there is a stickiness to inflation, the Fed prefers to take a wait and see attitude before it lowers rates.

The majority of Fed voting members now see one cut this year, and it is unlikely that this cut will happen before its December meeting. The median targets for the Fed funds rate at the end of 2024 is 5.10%, at the end of 2025 is 4.10% and at the end of 2026 is 3.10%. The median long range target has gone up from 2.60% to 2.80%.

Market expectations as we began 2024 were that the Fed would lower interest rates several times this year (beginning early in the year).

Instead, inflation measures for January and February were elevated and the Fed has maintained the Fed funds rate at a 5.25% to 5.50% target. The most recent CPI indicators may show some progress on curbing inflation, but it much too early to say that we are heading back towards Jerome Powell 2% inflation target.   Meanwhile, but the economy has performed exceptionally well through the beginning of the year with the Dow crossing 40,000. Most economists agree that the economy has adjusted surprisingly well from a low interest rate era to a higher interest rate one.

Chase CEO and Tufts alumnus Jamie Dimon correctly pointed out to Bloomberg last week that significant inflationary forces remain. These include the restructuring of trade, infrastructure requirements of the green economy, remilitarization of the world and fiscal deficits. Dimon, in fact, thinks it is a 50-50 question of whether the Federal Reserve's next move is higher or lower. (The video of Dimon's comments is here.)

Against that backdrop, we really need to ask why the Fed would act now or anytime soon (presumably in September) to cut rates?

It strikes me that there are three realities that could - independently or in some combination - cause the Fed to cut rates before the end of the year.

First, the Fed could see data indicating that the US economy is slowing and act proactively to lower rates to try to extend the economic cycle.   There however is nothing in the data today suggesting any sort of slowing of the economy.

Second, the Fed could lower rates in response to a banking crisis, presumably one that results from high rates causing a cascading effect in commercial real estate resulting in many regional banks becoming illiquid. Jerome Powell, however, has been asked in press conferences whether this would cause a crisis that the Fed might respond to and has indicated that it might not, and the Fed let the Treasury contain the Silicon Valley Bank failure in 2023.

Third, there could be political influences ahead of the election that the Fed would be responsive to.  It however is starting to seem unlikely that the Biden administration would try to encourage a Fed move before the election as polls show that voters are not crediting him with the strong economy but that are blaming him for inflation. Were they however to call for lower rates, Powell and the Fed could be prompted to act, especially as Trump is also calling for lower rates now. Powell did lower rates for no reason after Trump jawboned him into it in July 2019.

Unless you believe that one, two or all three of the above are likely to materialize soon, it might be best stay in savings for now.

Compare savings rates here.