19 September 2024
Alex Grassino, Global Head of Macroeconomic Strategy
The US Federal Reserve (Fed) kicked off its long-awaited monetary easing cycle with a bang on 18 September (US time), electing to reduce its policy rate by 50 basis points (bps). While the size of the rate cut wasn’t officially factored into many Fed forecasters’ base-case scenarios, it wasn’t a real ‘surprise’ decision either. In this Market Note, Alex Grassino, Global Head of Macroeconomic Strategy, provides his latest analysis on the Fed meeting.
Our rate forecast
If the US economy cools—and we maintain that it probably will—there may be future points at which some of the economic data surprises to the downside, potentially triggering a more aggressive policy response from the US Federal Reserve (Fed). Consequently, our current expectation is a further 75 basis points (bps) of easing, which would bring the federal funds rate to 4.25% (upper bound) by the end of 2024. Looking to 2025, we now anticipate that the policy rate will reach 3% before the end of the year.
Three important themes to highlight
The US Fed kicked off its long-awaited monetary easing cycle with a bang yesterday, electing to reduce its policy rate by 50 bps. While the size of the rate cut wasn’t officially factored into many Fed forecasters’ base-case scenarios, it wasn’t a real ‘surprise’ decision either. Over the past several days, market positioning had already been skewing toward the prospect of a 50-bps cut coming out of the Fed’s September meeting, as various prominent (and mostly well-informed) members of the financial press began to suggest that it was, in fact, likely to be a much closer call than the consensus 25-bps cut that had been priced into markets following last week’s Consumer Price Index (CPI) inflation print.
Here are our takeaways from the Fed’s latest SEP, released yesterday:
We’d instead turn our attention to the Federal Open Market Committee (FOMC)’s post-meeting statement and press conference. Since Fed Chair Powell’s Jackson Hole speech, there has been a clear move away from the Fed being purely focused on driving down inflation toward reemphasising the other part of its dual mandate: full employment (i.e., a healthy job market). The FOMC essentially codified this shift in yesterday’s statement, adding the line “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2% objective.”
In our view, the implication of this addition is that, while the base-case outlook is for gradual policy easing, there appears to be a low bar for the Fed to move more aggressively in cutting rates than what’s being telegraphed as of this writing.
We suspect that such scares may indeed occur in the months ahead. If the US economy cools–and we maintain that it probably will–there may be future points at which some of the economic data surprises to the downside, potentially triggering a more aggressive policy response from the Fed. Consequently, our current expectation is for a further 75 bps of easing, which would bring the federal funds rate to 4.25% (upper bound) by the end of 2024. Looking to 2025, we now anticipate that the policy rate will reach 3% before the end of the year; we’d previously called for the federal funds rate to hit our estimate of neutral a couple of quarters into 2026.
We see three important themes worth highlighting now that the Fed’s easing cycle is finally underway:
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.
Better income – Preferred securities
Over the past three years, preferred securities showed slightly higher volatility than US Treasuries, but less volatile than other rate-sensitive assets like US mortgage-backed securities (MBS) and US investment-grade bonds. Preferreds also demonstrated a relatively better return than US Treasuries, MBS and investment-grade bonds.
Hong Kong/Mainland China market update
Mainland China’s Third Plenum 2024 concluded with structural reforms in key areas, and the government introduced some concrete measures. The Greater China Equities Team believes that mainland China is focusing not only on long-term structural reform but also on short-term economic targets. The series of fiscal and monetary announcements, along with greater subsidies and infrastructure spending, should support a faster recovery in domestic demand.
Better income: Global multi-asset diversified income
The Global Multi-Asset Diversified Income approach remains focused on generating higher, sustainable natural yields from a range of assets with lower correlations and expected relatively lower volatilities.