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March Interest Rate Cuts Cancelled: Now What?

Last week, the U.S. Federal Reserve reversed its signaling to cut interest rates in March. The hot jobs report last Friday reaffirmed the FOMC’s higher for longer “HFL” interest rate policies. The stock markets shrugged in response, closing at all-time highs.

Policy Decision

Chair Powell said that inflation eased from its highs without increasing unemployment by much. This is the first step for the much-desired soft economic landing. Still, inflation is above the Fed’s 2.0% target. It lowers the probability of a 25 bps rate cut. Currently, the bank continues its balance sheet runoff. This effectively raises rates without disrupting the debt markets.

Income investors should take the HFL conditions seriously. Dividend stocks, especially those with heavy debt, carry greater risks. AT&T (T), BCE (BCE), Rogers (RCI), and Charter Communications (CHTR) are less appealing investments. CHTR stock is especially troubling. It lost 16.5% on Feb. 2 after posting internet customer losses. Revenue barely changed Y/Y while net income fell by 11.5% to $1.06 billion.

Pressure will mount for REIT valuations. Realty Income (O), Simon Property (SPG), Kimco Realty (KIM), and W.P. Carey (WPC) pulled back since mid-Dec. 2023. They risk falling further as investors park their cash in money market funds instead.

Rate Cut Target Date

Markets should plan for a second-half 2024 interest rate cut. However, markets are valuing stocks based on a March 2024 rate cut.