Market Update - FOMC signals easing cycle could begin soon
Aug 1, 2024
- As expected, the FOMC kept rates unchanged at the July FOMC meeting. The Fed funds rate remains in the 5.25-5.50 per cent range. We expect the FOMC to begin the monetary policy easing cycle in September by cutting the Fed funds rate 25 basis points to a range of 5.00-5.25 per cent. In 2025, we expect the FOMC to cut rates three times, leaving the Fed funds rate at 4.25-4.50 per cent
- There were only a few changes to the statements this time, but they were dovish in nature, leaving the door open to a possible rate cut in September
- Fed Chair Jerome Powell stated, “We are maintaining our restrictive stance of monetary policy in order to keep demand in line with supply and reduce inflationary pressures.”—indicating that the Fed needs to see further disinflation to ease
- The US economy is slowing, but growth remains above-trend. Labour markets are cooling as the unemployment rate is drifting higher. In June, the US PCE deflator pierced the Fed’s 2.0 per cent symmetric target range of 1.5-2.5 per cent
- Financial markets have shifted of late, reflecting the weakening economy and the better inflation data. The assumption is that the odds of the onset of a Fed monetary policy easing are higher. In addition, small cap equities have rallied with the increased odds of lower interest rates
- We acknowledge that in the short term, equity markets will see some continued two-way rotation between sectors and the value and growth styles as they weigh the run-up in valuations, the economy and the impact of the expected rate cuts. However, in the longer term, continued disinflation, lower interest rates, and strong profit growth (in spite of the slowing economy) will provide a solid backdrop for US equities, in our view. Lower policy rates would lower the cost of capital, which historically has been quite accretive to earnings. It remains an earnings-driven equity market—S&P 500 earnings are forecast to rise 10.9 per cent in 2024 and 14.8 per cent in 2025. Lower rates should also help boost M&A and investment activity. So, we maintain our US equity overweight and our balanced sector stance
- Fixed income investors should continue to look for lower policy and market rates. They should also keep an eye on quality and investment grade as the business cycle slows and balance sheets feel the stress. We continue to put our cash to work in bonds and multi-asset strategies
- The July FOMC has done little notable to challenge our USD view. US economic resilience, relatively high yields, monetary easing elsewhere, and sometimes underwhelming activity data outside of the US, can still contribute to a firm USD, particularly with so much Fed easing already assumed