The Fed Message Is Clear: Expect Rates To Be Higher For Longer

What happened?

The Federal Reserve (the Fed) decided to keep interest rates where they are on Wednesday, as was widely expected. But don’t count on that sticking around for long: 12 of 19 Fed members gave their stamp of appoval on another rate hike by the year's end. What’s more, officials are clearly dialing back the number of rate cuts they're eyeing for 2024, now predicting a 5.1% benchmark rate by next year's close instead of the 4.6% they forecasted in June.

Still, the quarterly economic projections that followed the two-day policy gathering sounded hopeful, with the Fed forecasting robust growth, a low unemployment rate, and inflation below 3% next year. The 2% inflation target, however, looks to remain elusive until 2026.

What does it mean?

Those updated projections show that you can expect rates to stay higher a tad longer, at least long enough for the Fed to be sure inflation is well and truly stamped out. But despite words of caution that nothing’s guaranteed, the Fed appears to be betting big on the economy staying strong enough to avoid a recession while inflation falls back toward target – a so-called "soft landing". And that confidence makes it unlikely that we’ll see any major policy relaxations anytime soon.

Why you should care?

Investors already seem to be bracing for sustained high rates – and despite the Fed’s prediction that everything will be fine, that’s likely to create some volatility and pullbacks in asset prices in the near term. That’s because the central bank isn’t always spot-on with predictions (case in point: the overly optimistic forecasts just before the 2008 global financial crisis). And the higher interest rates remain, the bigger the risks to the economy. Markets agree: following the Fed's announcement, Treasuries took a dive and the S&P 500 recorded its second steepest decline this year.

Now, several factors may allow the central bank to change course: rising gas bills, possible auto strikes, a possible government shutdown. But because those very factors would indicate economic weaknesses, they’re no saving grace for stocks. Put more simply, we’re walking a tightrope.

So you might want to double-check that your portfolio's prepped for rocky roads. Make sure it’s diversified across asset classes, styles, sectors, and regions – and keep some cash on the side. If there's a silver lining to those towering rates, it's the decent returns on parked money, giving you the edge when better investment opportunities crop up.