Crash or land: What does the Fed's decision mean for wealth management?

February 1, 2024 4:00 PM

Amid the turbulence of high inflation and fears of a recession, the Federal Reserve has been trying to bring the U.S. economy in for a soft landing.

For the past two years, a daunting question has hung over the U.S. economy: Are we heading toward a soft landing or a recession?

Every few weeks, a new bit of data — fresh inflation numbers, a new jobs report, a change in interest rates — gives us a clue as to which direction we've taken, like blinking lights on a radar screen.

To interpret those signals, Financial Planning is starting a new series: "Crash or Land." Here we'll hear from some of the nation's top economic analysts, from big names like JPMorgan and Goldman Sachs to newer voices like Cetera Financial Group and the social investment network eToro. Taken together, their insights will give us a sense of the economy's latest course — and what it means for wealth management.

For our inaugural edition, we're taking a look at the holy grail of data points: a meeting of the Federal Reserve. More than any other policymaker, the Fed has been in the pilot's seat, carefully dialing up interest rates to tame inflation without crashing the economy. In 2022 and 2023, the central bank raised rates 11 times — but more recently it's been holding them steady, as it did once again on Wednesday.

"Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings," Fed Chair Jerome Powell said after the meeting. "Given how far we have come, along with the uncertainties and risks that we face, the Committee is proceeding carefully."

Only a month ago, the Fed indicated that it will probably cut interest rates three times in the second half of 2024. The markets swooned over the news, with the S&P 500, Dow Jones and Nasdaq all jumping by about 1.4%.

Wednesday was less jubilant. Though Powell once again hinted that monetary easing is on its way, his cautious tone gave many the impression that the first cut is still a ways off — and perhaps unlikely to come at the Fed's next meeting, in March. As Powell spoke, the S&P 500 fell by 1.6%.

"No one is declaring victory," Powell said. "That would be premature."

So where does that leave us? Is the economy closer to landing or to crashing? And what does the news mean for investors and their financial advisors? Which investments will benefit from the Fed's decision, and which ones will get hurt?

To find the answers, Financial Planning reached out to some of the sharpest and best-informed minds in wealth management. Scroll through the cardshow below to read their comments and statements:

Looks like a soft landing

Gene Goldman, chief investment officer at Cetera Financial Group

"We anticipated the Fed would not cut rates following yesterday's meeting. Unless the economy slows drastically or inflation falls faster, they won't cut rates any time soon. When we look at the data, the Fed appears on track to guide us to a soft landing.

"It's imperative that Powell is cautious with his forward-looking statements, since the economic data could change drastically between now and the next Fed meeting in March. While the markets anticipate six cuts this year and the Fed is planning on three, we believe the answer lies somewhere in between three and six cuts. Most likely four cuts — more than the Fed because inflation is falling faster than the Fed predicted in their Dot Plot for 2024 and less than the markets because the economy is stronger than the markets expect.

"[Wednesday's] decision shouldn't alter advisors' investment strategies for the near term. Market volatility could be elevated if the Fed is reluctant to cut rates in weak growth or falling inflation. As such, this volatility would favor bonds and equity asset classes, such as small caps and value, that have been out of favor in recent months."

Cuts coming soon

Bret Kenwell, U.S. options investment analyst at eToro

"Economic data remains resilient and the Fed's fight against inflation continues to gain ground. While the Fed did not cut interest rates at its most recent meeting, it's more a question of 'when' rather than 'if' the Fed will cut rates. For now, the Fed seems to have orchestrated the soft landing it was hoping for — a strong labor market and economy with lower inflation.

"Chair Powell said the Fed doesn't need to see better data, just a continuation of the good data we've received. If the economy remains strong and there's more progress on inflation, we could see the Fed cut interest rates as soon as March, but almost certainly by May.

"Stocks and bonds have performed well in anticipation that the Fed will eventually cut interest rates and against a backdrop of better-than-expected economic growth. If the economy remains strong and the Fed begins to cut rates, stocks and bonds should continue to perform well."

Not so fast

Elyse Ausenbaugh, global investment strategist at JPMorgan Wealth Management

"The Federal Reserve just delivered its first decision of the year. They held their policy interest rate steady, but that was the consensus expectation heading into the meeting. What the market really cared about was what Chair Powell had to say about the path from here.

"Last year's debate around how high the Fed Funds rate would go is over — the takeaway we gathered from the Fed's messaging was that barring any meaningful reacceleration of inflation, the next move in their policy rate is going to be lower.

"The question now is how long the continuation in favorable inflation data needs to last before the Fed gets comfortable enough to deliver a rate cut. Before the meeting, markets were placing 50/50 odds of the first one happening as soon as March, but Powell threw cold water on the idea of it happening so soon.

"Whether by March, May or June, we think one thing is clear: Rate cuts are coming. We think they'll be delivered against a backdrop of continued economic growth and a sturdy labor market (that is, a soft landing scenario). As for what it means for investors, note that this would mean that yields on cash and ultra-short income instruments are headed lower. Remember that stocks and bonds both have posted solid returns — both in absolute terms and relative to cash — when the Fed did manage to stick a soft landing."

Keep an eye on bonds

Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management

"As anticipated, the Federal Reserve has shifted its stance from a hiking bias to a data-dependent approach. With steady economic growth, it is expected that policymakers will wait for more evidence of a sustained down trend in inflation before making any changes.

"The market's expectation of a 50% probability of a rate cut by March seems reasonable, given the recent positive signals from the Fed's preferred measures of inflation and wage growth.

"For investors, now is the time to secure attractive yields on high-quality bonds to earn attractive income and position for rate relief as central bank policy rates look set to end the year lower for the first time in two years."

Stay the course

Brian Rose, senior U.S. economist at UBS Financial Services

"Following [Wednesday's] meeting, CIO's base case remains that the Fed will cut rates by 100 basis points in 2024, with the first cut in May, and that the U.S. economy remains on course for a soft landing. The actual path of rate cuts will depend mainly on the inflation data, but the labor data will also be important, including Friday's payroll report. As demonstrated by [Wednesday's] market action, uncertainty over future policy moves by the Fed and other central banks around the world may result in choppy markets in the months ahead. Even after the Fed starts to cut rates, they will remain highly data-dependent, with policy decisions likely to be made on a meeting-by-meeting basis. Geopolitics is another potential driver of volatility in 2024. We should also keep in mind that, despite the recent favorable developments on both growth and inflation, downside risks remain.

"The CIO investment outlook remains unchanged after the FOMC meeting. We continue to favor quality bonds and stocks as the best way to navigate this macroeconomic uncertainty, while still expecting positive returns for bonds and equities through year-end. The recent data has been consistent with our upside Goldilocks scenario, in which small-cap stocks should do especially well."

A new beginning

Jeffrey Roach, chief economist at LPL Financial

"The employment and inflation goals are moving into better balance but it seems there is a slight emphasis toward inflation risks.

"Markets are increasingly confident that the Fed could make its first cut in March if inflation continues to move downward and job growth falters.

"Businesses are set to benefit from falling interest rates this year and if the Fed moves early enough, the economy should evade a hard landing.

"For now, it's all about the committee gaining greater confidence that inflation is indeed easing.

"Bottom line: As long as supply pipelines remain unclogged and firms do not pass along higher transportation costs to the consumer, we could expect a cut at the next meeting. Risk assets should benefit as the Fed moves into a new era of monetary policy."