One thing that moved markets  

... is Federal Reserve Chairman Jerome Powell’s two-day testimony to congress. To cut or not to cut, that is the question. 

Delivering the central bank’s semiannual Monetary Policy Report, the Fed Chair covered interest rates, inflation, and the state of the U.S. economy. 

In prepared remarks, Powell reiterated that the Federal Open Market Committee does not expect rate cuts until it’s confident inflation is moving sustainably toward a 2% target. Powell added that premature cuts to rates run the risk of reigniting inflation or even opening the door to additional rate increases.  

That said, Powell also acknowledged the risk to economic growth if rates remain high for too long. Ultimately, he does expect the central bank to cut interest rates in 2024 but avoided giving a definitive timeline as the committee maintains its data-dependent approach to policy.¹  

How we've seen progress on inflation 

Inflation hit a multi-decade high of 9.1% in June 2022.² Since then, the Fed has remained adamant about a goal of returning inflation to 2%, and its primary tool for accomplishing that is raising the federal funds rate, which influences the cost of borrowing across the U.S.  

The central bank has raised interest rates 11 times since March 2022, bringing the federal funds rate to its own multi-decade record of 5.25-5.5%, where it has held steady since mid-2023.³ 

In response to this tighter monetary policy, inflation has steadily retreated to roughly 3%.⁴ But the last mile to 2% is proving to be more challenging, and the Fed doesn’t want to prematurely declare victory by cutting rates too early. 

Why upcoming data is important 

With the Fed exercising patience, the market’s expectations of an imminent rate cut have been tempered. The Fed’s dot plot released at the end of 2023 suggested there could be three cuts in 2024.⁵ At the start of the year, Wall Street expected four to six rate cuts in 2024, per the CME FedWatch Tool.⁶

How this impacts markets and the economy 

In the meantime, higher rates can impact interest-rate-sensitive assets like real estate, especially as refinancing deadlines come due later in the year. On the flip side, they also typically lead to attractive returns on cash, providing a low-risk opportunity to earn upwards of 5% on APY through high-yield cash accounts and similar savings tools. 

For consumers, higher rates mean mortgages, auto loans, and credit card debts cost more. 

On a macro scale, this could be a headwind for consumer spending, which accounts for roughly two-thirds of U.S. GDP growth.⁷  

High interest rates can also be challenging for businesses, often leading to layoffs or other cost-cutting measures. 

What consumers should be thinking about 

As the Fed awaits proof the inflation rate is returning to 2% and likely to stay there, monitoring economic data over the next several months can help gauge pricing trends and economic strength. 

If inflation continues its trajectory back to 2% over the next few months, at least one rate cut in 2024 remains highly likely. However, if inflation accelerates or stubbornly hovers around 3%, the Fed’s policy path remains to be seen. 

And a few top headlines  

1. Google-backed generative AI startup Anthropic debuted a new chatbot and suite of AI models.⁸ The most advanced of these reportedly outperformed OpenAI’s GPT-4 and Google’s Gemini Ultra on industry benchmarks. 

• If you or your business leverages AI for productivity, this new model could significantly improve output. 

2. Costco is replacing its $9.99 roast beef sandwich food court item with a $6.99 turkey Swiss sandwich.⁹ 

• Compared to its other food items, Costco’s roast beef sandwich was on the higher end of the low-cost menu; as the cost of many food items have gone up, some menu items are going down. 

3. Target announced a paid membership program similar to Amazon Prime, giving customers free same-day delivery on orders of more than $35.¹⁰  

• Major retailers are competing with Amazon’s fast delivery system, giving consumers more options. 

4. Salesforce announced a new suite of AI solutions for healthcare workers to help with booking appointments, summarizing patient information, and sending referrals through conversational prompts.¹¹ 

• This could streamline administrative tasks across the healthcare industry, potentially increasing efficiency for employees and employers in the industry.  

5. The TSA is experimenting with a new self-service screening system at the Las Vegas airport to make travel more efficient as high post-pandemic travel demand continues.¹² 

• The average person who uses Empower Personal Dashboard^TM put $1,346 toward travel in January. As the highest category of credit card spending, travel may at least become more of a breeze with the TSA’s new system designed to reduce overall travel time.

What to be on the lookout for next week 

Next week, we’ll get a new batch of inflation data with February’s Consumer Price Index (CPI). Stay tuned.