- US Federal Reserve pleases markets with dovish tone
- Three rate cuts seen in 2024 and three more in 2025, even as US central bank raises growth and inflation forecasts
- Swiss National Bank reduces headline borrowing costs unexpectedly
- Stock markets respond favourably but gold also reaches new all-time high
“Global markets are welcoming what they see as a dovish statement from the US Federal Reserve, and one that promises rate cuts soon enough, while the Swiss National Bank’s unexpected rate cut can only boost investors’ conviction that we are at the peak of the interest rate cycle and moving into a welcome phase of reductions in the headline cost of money,” says AJ Bell investment director Russ Mould. “Japan may be heading off in the opposite direction, but cuts from the Swiss, as well as the Brazilian and Czech monetary authorities, among others, in March take this year’s total to 26 interest rate reductions worldwide, compared to just nine increases.
Source: Swiss National Bank, LSEG Datastream data
“At the current pace, 2024 is therefore easily on track to exceed 2023’s total of 81 interest rate cuts while the chances of central bankers racking up last year’s 160 hikes look pretty slim.
Source: www.cbrates.com
“That said, the pace of change could yet surprise economists, investors and would-be borrowers and lenders alike. After all, the markets began 2024 with an expectation that the US Federal Reserve would cut interest rates six times to 4.00%, with the first cut coming in March.
“Fed chair Jay Powell and the Federal Open Markets Committee (FOMC) did not deliver at this month’s meeting and although they continue to lay the groundwork for cuts, the first move down is now expected in June and bond and stock market investors are anticipating just three reductions, to 4.75%, by the end of the year, with three more to come in 2025.
Source: CME Fedwatch, US Federal Reserve, LSEG Datastream data
“This all fits with the narrative – which is providing so much fuel to the rally in global share prices witnessed since last October and leaving headline stock indices in Germany, France, Japan, Australia, Taiwan and America at new all-time highs – that inflation will cool, the global economy will enjoy a soft landing (at worst) and central banks can cut rates to keep the economy and track and allow financial markets to bathe in more cheap liquidity.
“It may not prove to be quite as simple as that. The Fed (and the Bank of England for that matter) is trying to strike the right balance between inflation and economic growth, so they do not leave policy too loose, so as to fuel the former, or too tight, to choke off the latter. It is only a year since three of the five biggest bank failures in US history, so financial market stability will still be in the back of their minds, and policymakers will not wish to be seen to be rocking the boat in a year when we will probably see a presidential election on one side of the Atlantic and a general election on the other. Helping governments to cope with surging interest costs on their debt, which crimp their ability to spend and invest, may also impact central bankers’ decision making, even if inflation is their primary consideration.
“Markets seem convinced the Fed has got their back, judging by how the S&P advanced to a new peak after Mr Powell’s announcement on Wednesday.
“But even the lowered expectation of three cuts is not a certainty. The nineteen-member FOMC’s ‘dot-plot’ shows that nine members expect just two cuts in the next year, nine expect three and one expects four.
“Moreover, the bond market is taking a more reserved view, too. The two-year Treasury yield, which tends to move six to nine months before the FOMC does, is currently 4.57%, so that implies just three rate cuts in the next two years, not six.
“And it does seem odd in some ways that the Fed should be so keen to cut interest rates when it is upgrading both its GDP growth and inflation forecasts for 2024.
Source: LSEG Datastream data, US Federal Reserve
“Some Fed officials, and more than a few bond market vigilantes, may therefore be concerned that the Fed is in danger of leaving policy too loose and unleashing inflation. This could also explain why it is not just the US stock market that is chalking up new all-time highs. Gold is doing the same, as it crosses the $2,200 an ounce threshold for the first time.”
Source: LSEG Datastream data, US Federal Reserve
