The Fed's new interest-rate outlook may roil markets

The good news from the Federal Reserve's meeting on May 1 was that the central bank isn't raising rates.

Fed Chairman Jerome Powell even said as much at his news conference on Wednesday: "It is unlikely the next move will be a hike."

The bad news is that it is not cutting rates, at least for a while, and probably not until the fourth quarter of 2024. Powell conceded that inflation is still too strong—and stronger than the Fed expected.

But Powell said the Fed really wants to cut rates.

A delay to the timeline for rate cuts curbed a stock-market rally that erupted following Powell's "unlikely" remark. How investors react next isn't clear.

Related: Fed holds rates steady, hints when interest rate cuts will happen

The extra time it's taking to get to the Fed's long-standing 2% target rate is "painful and inconvenient," Powell said at his news conference after the Fed announced its rate decision. Especially for lower-income families living from paycheck to paycheck.

He said, however, that he remains confident the Fed will get to the target. "Everyone will benefit" when it occurs, he said.

Some observers are not sure the Fed will cut rates much because they believe some forces at work in the economy won't react to rate cuts. An example, noted Jeffrey Gundlach, CEO of DoubleLine Capital, during a CNBC interview, is rising insurance rates.

Stocks go up — and then take a dive

It took the stock market a little while to appreciate what Powell was really saying. At 3 p.m. ET, the Standard & Poor's 500 Index was up as much as 60 points. The Dow Jones industrials were up some 500 points.

But then worries about how long inflation would persist weighed in.

The S&P 500 ended the day down 17 points to 5,018. The Nasdaq, up as much as 268 points, slid to a 52-point loss at 15,605.

The Dow managed an 87-point gain, largely because of gains for Amazon.com (AMZN) , Microsoft (MSFT) , and Johnson & Johnson (JNJ) .

Mortgage and consumer rates will stay high

As important, the yield on the 10-year Treasury bond had fallen to 4.585% after Powell predicted no rate hikes. But it jumped back up to 4.639% at the close of trading.

This is not good news for people interested in mortgages, car loans, and long-term business financing.

Home sales have been stagnant since the Fed started raising its key rate, the federal funds rate, in early 2022. It was nearly at 0% then. It's been at 5.25% to 5.5% since July 2023, and all lending rates went up with the fed funds rate.

On May 1, mortgage rates fell on the Fed news from 7.51% on a 30-year fixed-rate mortgage to 7.46%. That's not much of a change, though. If you're buying a $350,000 house with a $280,000 loan, the difference in monthly payment is roughly $18.

At the same time, the rate on a 30-yield loan has been above 7% for at least two weeks.

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If you had closed on a mortgage loan in early February, when the 30-year rate hit 6.6%, the payment would have been $1,246, compared with $1,485.

This reality hit real-estate-related stocks. PulteGroup (PHM) , parent of one the biggest U.S. home builders was up to $114.88, a gain of nearly 3% after the Fed announcement, but closed at $111.82, up only 0.4%.

It also means businesses looking for new capital to expand or acquire a company will still face relatively high financing rates.

Home sales and new construction depend on lower interest rates. Shutterstock

Economy not experiencing stagflation.

Powell bristled at the idea that the U.S. economy was entering a period of stagflation.

He remembered when inflation topped 10% in the 1980s, with unemployment surging to 9%. Inflation now is around 3%, with unemployment at 3.8%.

"I don't see the 'Stag' or the 'flation," he said.

A quiet easing move

While the Fed left the Fed Funds Rate unchanged, it actually did a little bit of easing.

It has been selling securities it bought during the pandemic, a process called quantitative tightening, to slow inflation.

Until now, it has been selling those bonds at a pace of about $60 billion a month, pressuring rates higher.

However, beginning in June, it will cut its sales to $25 billion a month, easing upward pressure on rates.

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