Quarterly Update: Q4 2024
The Fed: The Fed Is in No Hurry to Raise Interest Rates
- The Fed is confident that inflation will reach the target rate of 2.0%.
- The Fed is now focused on fine-tuning monetary policy to keep the economy on a positive trajectory.
- We anticipate the Fed maintaining a cautious approach to monetary policy for the first half of the year or so.
The Federal Reserve is getting close to accomplishing its goals. After hiking rates by 525 basis points (bps), which helped bring inflation down from a peak rate of 9.1%, the Consumer Price Index (CPI) is now hovering around 3.0%, near the Fed’s target rate of 2.0%. Despite the aggressive rate hikes, the unemployment rate didn’t budge much. It currently stands at 4.1%, a level within the 4.0% to 4.5% range, which is generally considered full employment.
With the Fed feeling confident that inflation will reach its target rate, albeit slowly, it has started lowering the highly restrictive federal funds rate. Since September, in the three meetings that policymakers have had, they have cut interest rates and brought the rate down by a cumulative 100 bps, now at 4.375%. But at its most recent meeting in mid-December, it announced a slower pace of future rate cuts, calling for just a 50 bp decline in the federal funds rate over 2025 (Chart 1).
Chart 1: FOMC Projections: Federal Funds
%, mid-point
Source: Federal Reserve Bank, as of December 2024.
Information is subject to change and is not a guarantee of future results.
This means the Fed is moving into a new phase. The Fed is now focused on fine-tuning monetary policy to keep the economy on its upward trajectory while guiding inflationary pressures downward. The Fed will no longer be center stage; corporate earnings, the changing political landscape, and the regulatory environment will replace it.
This does not make the task any easier for the Fed. Economic growth is solidly above trend (GDP in the past year has increased 2.7%, while the Fed believes the long-term trend is 1.8%) (Chart 2), and price pressures remain sticky.
Chart 2: GDP
% change, annualized rate
Source: Source: Federal Reserve Bank, Bloomberg’s WIRP page as of October 2024.
Information is subject to change and is not a guarantee of future results.
Further complicating the Fed’s outlook for the economy is the growing list of unknowns focused on the new administration’s plans for fiscal policy, tariffs, and immigration.
We anticipate the Fed maintaining a cautious approach to monetary policy for the first half of the year or so. They will sit on the sidelines. Future interest cuts will depend on further inflation progress and the stability of the labor market. Furthermore, the Fed will want time to see the impact of the administration’s implementation of policy shifts.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
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There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
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Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Bloomberg Municipal Bond Muni Short (1-5) Index 1-5 year maturities of the US Municipal bond index.
The Bloomberg Muni Intermediate Index is an unmanaged index that tracks the performance of intermediate US government securities.
The Bloomberg US Government/Credit 1-5 Year Index tracks USD-denominated, investment grade, fixed-rate bonds, including treasuries, government-related and corporate issues. The Index includes securities with at least one, and up to, but not including, five years until final maturity.
The taxable Intermediate Government/Credit Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with a maturity greater than 1 year and less than 10 years.
The Morningstar LSTA US Leveraged Loan 100 Index is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans. It represents the 100 largest and most liquid issues in the institutional loan universe and is a cornerstone for measuring the pulse of the leveraged loan market.
The Bloomberg US High Corporate Bond Yield to Worst Index represents the semi-annual yield to worst of the ICE BofA US High Yield Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, which includes only securities rated BB1 or lower.
The Palmer Square CLO Debt Index is a rules-based observable pricing and total return index for collateralized loan obligation (CLO) debt for sale in the United States.
Yield to worst (YTW) is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity.
Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.
Definitions
Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations. MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.
The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).
*Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile
ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.
BPS: A basis point (BPS) is used to indicate changes in the interest rates of a financial instrument. Basis points are typically expressed with the abbreviations “bp,” “bps,” or “bips.”
A consensus estimate is a forecast of a public company’s projected earnings based on the combined estimates of all equity analysts that cover the stock.
Bureau of Labor Statistics(BLS): The BLS is a federal agency that collects and disseminates important information about labor, wages, prices, and productivity.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
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