- The market has priced in a 25bps cut from the US Federal Reserve today.
- Following last week’s jobs and inflation data further cuts are expected over the next year – but HL analysts are more cautious.
- Analysis shows that growth stocks outperform value following a rate cut.
Emma Wall, head of platform investments, Hargreaves Lansdown:
“It’s a big week for rates. Both the Federal Reserve and the Bank of England’s monetary policy committees meet this week, with the Fed up today followed by Threadneedle Street tomorrow. Markets have pretty much completely priced in a 25bps cut from the Fed, down from the current target rate of 4.25-4.5%. Given this expectation, the cut itself is unlikely to move markets – all eyes and ears will instead be on whatever Fed Chair Jerome Powell says in the corresponding press conference. At 2pm Eastern Time – 7pm here in the UK – Powell will announce the Federal Open Market Committee rate decision, publish the Fed’s Summary of Economic Projections and give some tentative forward guidance of where rates may go from here.
Last week, US economic data showed that inflation remained sticky and the jobs market was weakening. These two data points typically have an opposite impact on rate predictions – policy response for stubborn inflation to keep rates high, where poor jobs data suggests a troubled economy, to which the sensible response is to lower rates to boost growth. The market reacted to these counter points by favouring the jobs data and swiftly priced in four rate cuts over the next year. We are less convinced by this case – and are reminded how efficient the market was at pricing in falling inflation at the tail end of 2023, predicting as many as six rate cuts from the Fed through 2024.
Instead, the Fed cut rates only three times last year, and not until in the final quarter. While recession fears do remain for the US, we do not think the full impact of both the trade tariffs and the abolition of the de minimis tax have yet flushed through prices, and so the upward pressure on inflation is likely to remain for some months. The Fed will have to balance economic data in its path forward – making the case for two to three cuts, rather than four, over the next year. Bond markets have been efficient and volatile of late, responding as much to rhetoric – and social media posts – as data points. This is likely to continue until inflation is normalised and the target rate range is back around 3.5%.
As for what to expect from equities, analysis shows that it is growth stocks that do best following a rate cut, and value underperforms. Investors should be mindful of portfolio concentration and ensure that they have broad exposure across the US market cap – and not just AI-tech megacaps.”
