The Federal Reserve left US rates on hold at 5.25 – 5.5% last night as expected, but the interesting part was the accompanying commentary as usual.
Chair Jerome Powell noted the success the Fed has had in bringing inflation down to near its 2% target at 3.1%, and strongly implied there are a no more hikes to come.
It will instead be cuts that are likely in 2024, with markets now pricing in multiple moves down, beginning in the Spring.
“Equity markets have enjoyed a hearty boost after Federal Reserve chair Jay Powell indicated further rate rises were not needed,” said Russ Mould, investment director at AJ Bell. “While the market was already pricing in rate cuts from 2024, investors welcomed Powell’s comments with open arms. Having it spelt out was music to their ears.”
“The market has been waiting a long time for this pivot in monetary policy and it’s finally come. The news sent the Dow to a new record high and put the S&P within a whisker of the 4,766 closing price achieved on 31 December 2021, just before the sharp interest rate hiking cycle began.
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“The attention now shifts to when we could see rate cuts and it looks like May could be the magic moment,” Mould continued, “Many investors are hoping the more cuts we have, the greater the chance for markets to keep going up as long as we don’t see a serious recession.
“However, you have to consider why the Fed would need to cut rates in the first place – the obvious reason is to stimulate the economy in the face of slower growth. A cut in rates would be beneficial for consumers and businesses, but a slowing economy is hardly reason to celebrate as it makes it harder for companies to earn a profit.”
Whitney Watson, co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, believes the cuts may not start until the summer due to continued strong growth and a robust labour market.
“We foresee the initiation of a cutting cycle with a 0.25% rate cut in June, with the Fed following a measured approach to reach a policy rate of 4.25-4.5% by the end of 2024—slightly below the updated median policymaker projection,” she said.
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“Market expectations align with this outlook. However, with potential downside risks to economic growth outweighing upside risks to inflation for the first time in several years, we believe there is a growing case for adding duration alongside exposure to high-quality fixed income assets in 2024.”
Neil Birrell, Premier Miton Investors’ CIO, added: “In the first, and most important, of the central bank announcements, the Fed kept interest rates unchanged. The key issue is the guidance provided, noting that inflation had eased its median forecast which is now for 0.75% of rate cuts next year.
“This gives real credence to the view that it thinks inflation is under control and believes that policy is producing the right outcome for the economy. This should give a further boost to risk asset prices, with bonds likely to lead the way. We will probably see markets move to discount a cut earlier as well, certainly in the second quarter.”
