Investors can expect rate cuts next year, but first they’ll continue to rise

The US Federal Reserve (the Fed) announced yesterday it will maintain the target range for the federal funds rate at 5% to 5.25%.

The decision to hold rates was not a surprise as indicators suggest economic activity continues to modestly expand, job gains have recently been robust, and the unemployment rate remains low—although inflation still remains high.

Holding the federal funds rate allows the Fed to assess future inflation risks and the implications for monetary policy. Tighter credit conditions for households and businesses are likely to weigh on economic activity and the decision to increase rates in the future. When determining if further rate hikes are needed, the Fed will evaluate how additional monetary policy tightening could help lower inflation.

“The Fed is committed to bringing inflation down to its long-term target of 2% and signaled additional rate hikes may be needed to achieve this”, says Giuseppe Pietrantonio, Associate Client Portfolio Manager, Multi-Asset and Currency Management at CIBC Asset Management. “Additional rate hikes later this year could place downward pressure on risk assets, specifically equities. Bond market participants should expect continued volatility as they weigh the probability of a recession.”

CIBC Capital Markets says although the Fed opted to skip an interest rate increase yesterday, investors should expect additional increases of 50 basis points (bps) in the future. Recent projections show the median federal funds rate at 5.6% by the end of 2023. However, interest rate cuts are still projected for next year with an estimated target federal funds rate of 4.6% by the end of 2024.

If you’d like to receive email alerts directly from CIBC Capital Markets, please sign up here.

At CIBC Private Wealth, we take a comprehensive approach to managing, building and protecting your wealth. If you'd like to discuss this market and economic update in more detail or have questions about your investments, please get in touch with your advisor any time.