Federal Reserve Holds Rates: Expert Reaction

Markets are now pricing in rate cuts from the Fed in 2024

James Gard 14 December, 2023 | 9:36AM
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Jerome Powell

The Federal Reserve left rates unchanged on Wednesday, as expected, but suggested that rate cuts are on the cards for 2024.

The key overnight rate was held at 5.25% to 5.50%.

Could the Fed be the first central bank to unwind some of the monetary tightening of the last two years? Can a soft landing be achieved for the US economy?

Here’s a brief round up of the reaction to last night’s decision:

Marta Norton, chief investment officer, Morningstar Wealth:

“The Fed delivered the widely anticipated pause in December, reflecting that that the hard work to rein in inflation is largely behind us. The dot plot moved more dovish than expected but comments left optionality, should inflation linger for longer. This isn’t our base case – given the scale of the rate hikes thus far, we expect the consumer to retrench, the economy to moderately slow, and the Fed to pivot.

"A soft-landing narrative should be good for both stocks and bonds. However, the market has anticipated this possibility of late, making it vulnerable to near-term pullbacks.  Moreover, at inflection points of this nature, timing is highly uncertain and we think investors are best served by incorporating a range of outcomes into their approach, including a deeper recession than we expect or a slower return to normal inflation.

"With this in mind, we favour stocks that would benefit from a soft landing, including regional banks, but we also have maintained exposure to the bond market’s improved yields in the event of a deeper-than-expected recession. Should inflation linger for longer, we own high-quality businesses that can pass costs along and select energy names with valuation appeal; MLPs and European energy, for example.”

Preston Caldwell, Morningstar chief economist

"While Federal Reserve chair Jerome Powell remains circumspect, the central bank appears to be inching closer to our expectation for a rate cut in March 2024.

"We believe that six cuts will take the federal-funds rate down to 3.75-4.00% by year-end 2024. That is in line with the median expectation implied by the federal-funds rate futures market, according to the CME’s tracker.

"A month ago, we were nearly alone in projecting a rate cut by March 2024, but that expectation is now priced into the market with a two-thirds probability.

"While Powell cautioned that it 'would be premature to declare victory', we believe inflation will continue to trend lower … Thus, we expect year-over-year core PCE inflation to drop from 3.5% in October 2023 to 2.4% by March 2024."

Tiffany Wilding, Pimco managing director and economist:

The Federal Reserve released an updated dot plot, which maps out policymakers' expectations for where interest rates could be headed in the future. The dot plot was more dovish than we expected. Median 2024 dots shifted down 50 basis points (bps) to show 75 bps of cuts next year (vs. our expectation that like September, it would only show 50bps of cuts). And importantly all but three officials see at least 50 bps of cuts next year.

Fed officials appear increasingly confident that they will achieve a soft landing next year. Fed officials’ economic projections show that they expect inflation to fall significantly with only a modestly below trend pace of growth, and trend-like unemployment.

“After Chair Powell acknowledged that the Fed did discuss the prospect for interest rate cuts at this meeting, attention will now to turn how soon and how many. With the economy still proving resilient, Fed officials will likely want to see additional evidence that inflation is continuing to moderate back to target before actually cutting rates. However, history suggests that once the Fed does ultimately start cutting, it could prove to be more rapid than what is implied by their median interest rate path for 2025.

Whitney Watson, co-head and co-CIO of fixed income and liquidity solutions for Goldman Sachs Asset Management:

“The Fed will wrap up its year with a slight sense of satisfaction, as core PCE inflation has decreased from its peak of 6.6% to 4% without a major slowdown in the economy or sharp rise in unemployment.

“Strong growth and labour market indicators preclude an immediate shift to rate cuts. Should disinflation continue in the coming months, we would expect policy normalisation from next summer.

“We foresee the initiation of a cutting cycle with a 0.25% rate cut in June, with the Fed following a measured approach to reach a policy rate of 4.25-4.5% by the end of 2024—slightly below the updated median policymaker projection.  

“Market expectations align with this outlook. However, with potential downside risks to economic growth outweighing upside risks to inflation for the first time in several years, we believe there is a growing case for adding duration alongside exposure to high-quality fixed income assets in 2024.”


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for Morningstar.co.uk


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