Fed pause on interest rates may reward patient investors

05/08/2024 — Patience, a virtue often overlooked in the fast-paced world of investing, is now more crucial than ever. As the Federal Reserve extends the timeline for interest rate cuts, waiting for better progress on inflation, investors who can exercise this virtue stand to benefit in the long run.

Before last week’s Federal Open Market Committee meeting (the board of Federal Reserve governors that sets monetary policy for interest rates), Fed watchers were focused on how the central bankers would recalibrate market expectations regarding the timing of rate cuts. Recent inflation reports showing persistently “sticky” increases in specific consumer prices stoked fear in the market that the Fed’s next move would be to hike rates, not to cut them.

But Fed Chair Jerome Powell cooled this hot take during his post-FOMC meeting press conference in saying, “I think it’s unlikely that the next policy rate move will be a hike.” In other words, there’s a high bar for the Fed to cut rates but an even higher bar for the Fed to contemplate rate hikes.

Additionally, a prevailing sentiment of patience emerged during Powell’s press briefing, reflecting the Fed’s acknowledgment that “there has been a lack of further progress toward the Committee’s 2% inflation objective.” After the May rate-setting committee meeting, the Fed’s statement highlighted the recent stall in lowering inflation, which the central bankers see as a risk. While Powell offered no hint on the timing of a rate cut, he underscored this point by saying, “So far this year, the data have not given us that greater confidence.”

Despite the lack of good news on inflation, there is a silver lining for patient investors. Historical data shows that longer Fed pauses often correlate with better equity returns. In fact, in periods where the pause is greater than 100 days, the stock market has historically moved higher by an average of 13%. This should give investors reasons to be optimistic.

As we navigate through the second-longest pause on interest rate action, now at 280 days, it’s crucial for investors to maintain a long-term perspective. While past performance is not indicative of future returns, there is much to value in a well-diversified portfolio. This approach should give investors a sense of security and control over their financial future. Patience allows investors to harness the power of compounding, weather market volatility, and avoid emotional decisions that can leave them adrift from their financial goals.