The Fed held its rate, but the markets were mostly unfazed

• The U.S. Federal Reserve held its rates steady and indicated fewer cuts in 2024.
• Inflation cools: consumer price index data showed softer numbers across the board.
• Tariff tensions: the E.U. followed the U.S. with new tariffs on Chinese electric vehicles and goods.

The U.S. Federal Reserve (the Fed) decided to leave its rate unchanged, which was widely anticipated. However, the updated dot plot (the chart that tracks Fed officials’ rate projections) now indicates only one rate cut in 2024, compared to the three cuts projected in March. This also contrasts with money markets and analysts who were expecting two rate cuts next year. Interestingly, four Fed policymakers foresee no cuts in 2024, seven predict just one cut, and eight anticipate two cuts. This divergence sparked a notable market reaction; stocks, bonds, gold and crypto initially surged on softer consumer price index (CPI) data, only to somewhat reverse on the Fed's aggressive stance. 

Federal Reserve Chair Jerome Powell emphasized that the Fed's projections aren't set in stone and can be adjusted. He conveyed a cautious inflation outlook, assuming good but not great numbers, and expressed optimism about the latest inflation reading, hoping for continued improvement. The inflation report indeed showed cooling, with core CPI rising just 0.2% month-over-month (below the expected 0.3%). Year-over-year, core CPI was up 3.4%, which was slightly below forecasts. Headline CPI metrics were also light, with an annual increase of 3.3%. Some surprising key contributors to this cooling were a significant drop in airline fares and a decline in auto insurance prices.

With both these pieces of news, yields were lower on Wednesday, then went down even further on Thursday. This was because the U.S. Treasury's auction of $22 billion in 30-year bonds was a standout success. The high yield of 4.403% was the lowest since March, triggering a fresh round of bond buying, and pushing 10-year yields to session lows of 4.22%. This was the lowest since the end of March, marking a substantial drop from the recent high of 4.7% in late April. Let’s remind you that, in this instance, a drop is seen as a positive.

On the international front, tariff tensions escalated as the European Union (E.U.) followed U.S. President Joe Biden's lead by imposing new tariffs on Chinese electric vehicles (EVs) and other goods. The E.U. announced additional duties ranging from 17% to 38% on imported Chinese EVs, effective early next month. These duties were in addition to the existing 10% tariff, potentially raising some vehicle tariffs to 48%. It looks like we could be about to face another era of trade wars and tariffs impacting market sentiment and creating uncertainty. 

Listen to this week’s podcast for further insights.