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What If the Fed Doesn’t Cut Rates in 2024? Implications for Stocks, Bonds, and the Housing Market

Exploring the potential economic and financial market consequences if the Federal Reserve maintains current interest rates.

Fred Taylor //April 29, 2024//

Business people trying to get a block with interest rates word on it
Business people trying to get a block with interest rates word on it

What If the Fed Doesn’t Cut Rates in 2024? Implications for Stocks, Bonds, and the Housing Market

Exploring the potential economic and financial market consequences if the Federal Reserve maintains current interest rates.

Fred Taylor //April 29, 2024//

What happens to stocks, bonds and the housing market if the Federal Reserve (“the Fed”) doesn’t cut interest rates this year?

This is what seems to be on everyone’s mind.

Investors have been betting on rate cuts since last November, and this assumption has been the primary driver of the great stock market returns through March 31, 2024.

What seemed so obvious six months ago doesn’t seem to be in the cards anymore. Why is that? Two main reasons:

For credibility reasons, Federal Reserve Board Chair Jerome Powell can’t afford to make another mistake by cutting short-term interest rates too soon.

READ: Unprecedented Impact of Soaring Interest Rates — What It Means for the Economy

His first mistake was calling inflation “transitory” in 2021, which meant they had to play catch-up to tame inflation.

The Fed raised short-term rates 11 times to reduce inflation from over 9%. Currently, the Fed is worried about cutting rates too soon, which could reignite inflation by making the economy even stronger with looser monetary policy.

Other factors playing into the Fed’s decision-making process are the geopolitical tensions between Israel and Iran and Russia and Ukraine. Both conflicts could cause oil prices to go even higher and the U.S. dollar to get stronger. Higher oil prices are inflationary, and a stronger dollar hurts foreign sales for American exporters.

Stock market

In the middle of this month, the stock market gave back 6% of the 10% year-to-date returns at the end of the first quarter of 2024.

If the market does fall 10%, this would be considered a correction.

A lot will hinge on first-quarter corporate earnings beating expectations. More importantly, companies giving optimistic earnings guidance going forward.

Today the stock market is expensive, trading at a 20 Price to Earnings multiple when the average is 16. Inflation reports will be key to whether the Federal Reserve can cut short-term rates. Investors will be closely watching the Consumer Price Index (CPI), Personal Consumption Expenditures (PCE) and the monthly employment numbers to influence any Fed interest rate decisions.

Oil prices and geopolitical conflicts could play into investors’ appetites for riskier assets like stocks. We haven’t had a 10% correction yet in 2024 so I suspect we are due, and this could be taking place right now.

If that is the case, investors might want to consider a more defensive posture and buy dividend-paying stocks that have underperformed the Magnificent Seven AI/technology stocks. Energy, healthcare, financial and consumer staples companies could prove to be good alternatives with attractive dividends.

READ: How to Invest in 2024 — Insights from Wealth Managers and Stock Market Experts

Bond market

The bond market has continued to fool investors this year. Interest rates were supposed to go down in 2024, starting with the first-rate cut taking place at the Federal Reserve’s board meeting in March.

With higher inflation and a stronger economy, the Fed may not cut interest rates at all in 2024. Longer duration or more interest rate-sensitive bonds have punished investors with losses in 2024. A safer bet could be to stay short on the yield curve and buy treasury bills or a 2-year bond.

Bond funds tend to own bonds that mature in the 4–7-year range, so they won’t perform as well as treasury bills or the 2-year bond if rates stay here or rise. The yield curve is still inverted, meaning investors are getting paid more interest on short-term bills/bonds than longer-term bonds. If you have money in the stock market, you may not want to take on bond market risk; stay short with higher yields.

READ: Exploring Opportunities in the Global Stock Market

Mortgage rates

Unfortunately for new home buyers, mortgage rates are still well above 7% today.

The current 30-year mortgage is 7.5% and even a 15-year mortgage is 6.9%. Buyers and realtors were hoping mortgage rates would be available in the 6% range in 2024, but with the Fed not cutting interest rates, it doesn’t seem likely that there will be much relief on the mortgage front.

Buying a home is still unaffordable for most Americans.

During the COVID-19 pandemic, mortgages could be found as cheap as 3%-4%, but at 7.5% the monthly payments are just too high and not attainable. Americans also don’t want to sell their current home and move because they would be giving up their incredibly low mortgage rate and double their monthly interest payments when buying a new home.

This dilemma is causing home prices to stay high because there is no supply on the market. For those who must buy a new home, there is a lot of competition again with multiple offers.

READ: Housing Affordability Crisis in Colorado — Denver, Colorado Springs and Grand Junction See No Signs of Improvement

The bottom line

Stock market returns are predicated on what the bond market does. Typically, when interest rates fall, the stock market goes up in value because investors have an increased appetite for riskier investments like stocks.

Conversely, in a rising interest rate environment like we saw in 2022, the stock market dropped double digits. The tremendous rally in stocks since November of 2023 was built on the expectation the Federal Reserve would get inflation back to its 2% target and we would have a soft landing, meaning a strong economy and lower rates.

However, inflation is stuck around the 3.5% level which means the Federal Reserve can’t lower interest rates anytime soon, and quite possibly not at all this year. There are even some economists who believe the Fed may have to raise interest rates in 2024 to bring inflation down to 2%. That scenario is certainly not built into the market yet, and that outcome would more than likely cause a major sell-off or a new bear market. Only time will tell.


Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information.