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What if in the end there is no interest rate cut this year? Asset managers react to the latest Fed meeting
Macro

What if in the end there is no interest rate cut this year? Asset managers react to the latest Fed meeting

The Federal Reserve announced on Wednesday that it will keep its interest rate at 5.50% for 6th time in a row, as expected.
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Updated:

2 MAY, 2024

By Jose Luis Palmer from RankiaPro Europe

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Finally, the Federal Reserve (FED) meeting has not brought surprises, and the body, led by Jerome Powell, decided to keep interest rates unchanged in the 5.25%-5.5% range, maintaining the highest level in 23 years. Furthermore, the Fed highlighted the 'lack of progress' in reducing inflation to 2%, its target.

But what does this move mean, and what are the prospects for the year? Here are the opinions of fund management companies. Managers push away the so eagerly awaited rate cut.

A 'less hawkish than expected' Fed

John Lloyd, Lead, Multi-Sector Credit Strategies, Janus Henderson

As expected, the Fed sided with the higher-for-longer scenario, acknowledging the clear evidence of slowing inflation progress, but was careful not to let the market believe that the next move could be anything other than a cut.

The timing of this eventual cut remains a question. Markets welcomed Powell's statement and press conference, while many had expected a more hawkish tone from the Fed, with perhaps even a hint of the word 'hike', given the recent string of inflation data. It seems clear that the Fed Committee's March forecast of three cuts by 2024 was too aggressive, with the baseline scenario possibly approaching zero or a cut.

The Fed believes it is appropriately restrictive to bring inflation to its 2 per cent target over time, but acknowledged that it still needs to be more confident that we are going in the right direction before lowering rates. Not much changed in the overall statement, with the exception of some discussion of the lack of further progress in inflation. The Treasury balance sheet reduction cap was reduced from $60 billion to $25 billion per month, a bit more aggressive than many thought, as the Fed continues to reduce its balance sheet, but at lower overall levels. The Fed has clearly recognised that it still has a lot of work to do, but continues to believe that inflation will resume its downward trajectory later this year. It remains to be seen whether time will be enough to solve the inflation conundrum.

In general, we continue to believe that policy is making its own progress, albeit more slowly than in the second half of 2023. The normalisation process to return to the 2% target will clearly take longer than expected, but we believe patience is the right approach. We are seeing signs of slowing economic growth, which could indicate that the Fed's cuts are slowly making their way through the economy and this could negatively impact US macro data in the near future. We believe that whether it is higher yields for a longer period, or higher yields just for this moment, investors should continue to take advantage of the high yields of this period.

Is the inflation target of 2% realistic?

Tiffany Wilding, Managing Director & Economist at PIMCO

The US Federal Open Market Committee (FOMC) meeting acknowledged that inflation progress stalled in the first quarter of this year and that, as a result, central bankers are less confident that inflation will sustainably return to 2% over time. However, Fed Chairman Jerome Powell refrained from discussing the possibility of further rate hikes. He reiterated that monetary policy is tight and that the next policy move is unlikely to be a rate hike.

Previously, the FOMC had stated that it would be appropriate to reduce the target range for the fed funds rate once more confidence had been gained that inflation was moving sustainably towards 2%. Inflation data collected in the first quarter of 2024 should, if anything, reduce this confidence. Consequently, Powell admitted that the committee will wait longer before cutting rates.

At the June meeting, when the FOMC publishes its next Summary of Economic Projections (SEP), we suspect that FOMC members will revise their core PCE inflation forecasts upwards, bringing them closer to 3% (up from 2.6% in March), and will also revise the expected path for interest rates upwards. We believe that the median rate forecast for 2024 will still reflect the FOMC's expectation of at least one cut in 2024. However, the probability that the FOMC will not make any cuts has increased significantly. Of course, should the economy weaken and the unemployment rate rise, we would expect the Fed to cut in that scenario, and aggressively if necessary.

The Fed joins the 'wait-and-see' approach

Richard Flax, Chief Investment Officer, Moneyfarm

At yesterday's meeting, the Federal Reserve decided to keep its benchmark interest rates unchanged for the sixth time in a row, stuck in the 5.25 to 5.50 per cent range. Although the policymakers say they are inclined to cut rates by the end of the year, the disappointing direction of the latest inflation data prompts them to proceed with a wait-and-see approach.

From enthusiasm for the improvement in the economic balance, there has been a shift to more cautious tones, waiting to assess the evolution of potential risks. Today, with inflation higher than expected and the economy still buoyant, investors' attention shifts to Chairman Powell's upcoming press conference, hopefully offering further guidance on the Fed's monetary policy and future prospects.

Higher for longer

Susan Hill, Senior Portfolio Manager and Head of the Government Liquidity Group at Federated Hermes

The Fed's confidence has clearly been dented by the recent string of disappointing inflation data. Although the bar for a return to a tightening bias is quite high, it seems likely that the current fed funds target range of 5.25% - 5.50% will remain unchanged over the coming months. A notable addition to the FOMC statement was the acknowledgement of the recent lack of progress towards the Committee's 2% inflation target. Despite the Fed's loss of conviction on pricing, they chose to go ahead, as expected, with reducing the balance sheet liquidation volume, lowering the limit on Treasuries from $60 billion to $25 billion per month, and keeping the limit on mortgage-backed securities at $35 billion.

Volatile & slower inflation

Monica Defend, Head of Amundi Investment Institute

The Fed's meeting revealed a cautious approach; the central bank is in no rush to lower rates. That said, Fed Chairman Jerome Powell's comments were a little more dovish than the market expected, as he ruled out the possibility of rate hikes by being vague about when the central bank would ease monetary policy.

This week, US non-farm payrolls data will provide important information on labour market tightness, a crucial element for the monetary policy outlook.

We expect the US economy to slow gradually and the disinflationary trend to continue. But the inflation rate will be volatile and fall at a slower pace than expected. Therefore, we now expect three, rather than four, Fed taper cuts this year, with the first one in July. This is our baseline scenario, but an alternative scenario we are considering is the possibility that, if the Fed does not act in July, there will be two or even none this year.

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