18 September 2024
If you are covering the Federal Reserve's latest interest rate decision, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
“The Federal Reserve has fired the starting gun with a supersized 0.50% cut to interest rates, putting an end to its more than a year long run of holding rates steady at 5.25-5.5%. Investors had only begun to attribute a meaningful probability to a half point cut in the past week. Disappointing labour market data was published on the eve of the Fed’s blackout period, leaving it potentially unable to use forward guidance to its usual extent. This meant the meeting held an unusually high level of uncertainty for investors. However, with inflation falling further in subsequent data, officials will have weighed the risks of reigniting inflation against the evident cooling of the jobs market and clearly felt the scales tipped in favour of a larger cut.
“Today’s announcement also comes with an update to the Fed’s dot plot – the chart which shows where voting members of the Fed expect rates to be at the end of each of the next few calendar years. In its previous update in June, members appeared to be expecting an average of just one cut by the end of 2024. Now, there seems to have been a shift in expectations as at least a further one, if not two cuts are anticipated before year end. However, though the Fed has made a bold move in kicking things off with a 0.50% cut, it is perhaps more likely that we would see a 0.25% cut at its November monetary policy meeting as the Fed will still be reluctant to move too much too soon.
“Markets appear to have been a bit overzealous when it comes to pricing in how hard and fast the Fed will go with rate cuts, with rates expected to have fallen to around 3% in a year’s time. The latest dot plot has shifted significantly lower for 2025, but it is still above the level implied by market pricing. Though the market has already priced in the full potential for rate cuts in the year ahead, there is a risk that this may not materialise if inflation were to spike again. The US economy looks likely to avoid a recession at present, but we know all too well how quickly things can change so some caution is still warranted.
“The ECB opted to cut rates last week, and the Fed has followed suit. However, the Bank of England looks set to break the trend tomorrow, particularly following inflation figures this morning which showed headline inflation remained stagnant at 2.2% while core inflation rose."
