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Market Update - US Fed begins the process of monetary policy normalisation

Market update
Multi-asset portfolios
Fed
rate cuts
Market Update
US

Market Update - US Fed begins the process of monetary policy normalisation

Sep 19, 2024

  • The Fed meeting was closely watched, with market expectations split between 25bp and 50bp. In the event, the Fed policy normalisation started with a 50bp cut, moving the rate to 4.75 per cent-5.00 per cent
  • The split market views were also present at the Fed, which voted 11 to 1 to make the first rate cut—a 50bp move—in more than four years. No Fed official has voted against a policy decision in two years, and no Fed governor has dissented on a rate decision since 2005
  • The consensus among the Fed officials at the September meeting was that they now foresee two more 25bp cuts this year, followed by four more cuts next year and two more in 2026
  • We now forecast 25bp rate cuts at each of the next six policy meetings (though another 50bp “front-loaded” rate cut remains a risk for November), taking the federal funds target range down to 3.25-3.50 per cent by next June. This is slightly above the current market pricing of 3.1 per cent at that time
  • At this meeting, the FOMC updated its quarterly projections on real GDP growth, unemployment rate, inflation, and policy rates. The changes to the economic projections were small, with GDP growth expectations nearly unchanged, unemployment projections somewhat higher, and core PCE inflation slightly reduced
  • Regarding quantitative tightening, Powell mentioned in his opening remarks that the Fed also decided to continue to reduce its securities holdings at the same pace
  • During the press conference, Powell said the labour market "bears close watching" but is "in solid condition" and "we want to keep it there." When asked about the economy's vulnerability to a shock that could cause a recession, Powell said "I don't see anything in the economy right now that suggests that the likelihood of a downturn is elevated"–in line with our view
  • Although the market had been anticipating a rate cut, the 50bp move should provide scope for mild further falls in bond yields. As the Fed expects a soft landing, credit should be well supported, but we continue to prefer quality investment grade over high yield. As the rate cut cycle has now clearly started, making cash less attractive, we believe some of the very high cash and money market balances will be put to work in quality credit and multi-asset portfolios
  • Equity investors should continue to benefit from the dual tailwinds of resilient earnings growth and rate cuts. We thus maintain our overweight in US and global equities. Overnight, the sector rotation continued, reflective of our strategy to broaden sector exposure under our Priority #1 - Targeting earnings endurance amid moderate global growth

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