16 September 2024
If you are covering the latest news in financial markets, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
"The Fed is widely expected to make its first rate cut since March 2020 later this week, marking an important moment for markets, and investors are still split on whether it will be a quarter point or a half point cut.
"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 – is also anticipated. The most recent update came in June, when it indicated members expected at most two, and on average just one cut by the end of 2024.
"However, times have since moved on and we have seen inflation fall further, as well as signs of a weaker jobs market. Some may argue this is simply a normalisation after the spike in demand for employees following the pandemic and a reflection of strong growth in labour supply, which job creation can’t keep up with. Nevertheless, growth of payrolled employees has moderated in recent quarters. With all of this in mind, the Chair of the Fed and other members have indicated that it is now time to cut.
"Perhaps the bigger question is whether the market has been a bit optimistic about the scale of rate cuts over the next 12 months, with rates expected to be around 3% in a year’s time, down from the current level of 5.3%.
"Some believe that as rates fall, inflation is at risk of increasing again, while others suggest that inflation was primarily due to supply disruptions which have now eased, and the potential GDP growth rate of the US is picking up. It appears that the market has already priced in the full potential for rate cuts in the year ahead, though this may not materialise if inflation were to spike again. While the US economy currently looks likely to avoid recession, some caution is still warranted.
"The Bank of England is not expected to follow the same path and has been given just a 25% chance of a rate cut. Nonetheless, a further two cuts are priced in by year end, and the market is expecting just over five rate cuts to take the base rate to 3.5% by next summer.
"Voting members of the MPC have cautioned investors not to expect sequential rate cuts at every meeting, particularly given inflation is not yet cemented at the Bank’s 2% target and is instead expected to rise as the year progresses. Similarly, the weaker than expected GDP growth data that revealed there was no growth in June or July is a reminder that high interest rates combined with the government’s upcoming tax raising budget are creating headwinds for the economy. The coming cuts to rates should see some of that pressure ease, albeit gradually."
