The American central bank has commenced its easing cycle, cutting interest rates for the first time since 2020. Private banks are advising investors to take more risk.
The US Federal Reserve has cut the target range of its key lending rate by 50 basis points (bps) to 4.75 to 5 percent. Policymakers voted 11 to 1 with the lone preference for a 25 bps reduction.
«The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,» the Fed said in a statement. «The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.»
In response, investment strategists and economists throughout the private banking industry have issued responses to the start of the monetary easing cycle.
Interest Rate Outlook
According to a note by UBS Global Wealth Management’s chief investment office, another 50 bps cut is expected by the end of 2024 and its projections for the pace of monetary easing through 2025 are aligned with the Fed’s dot plot, which implies 100 bps of cuts next year. Julius Baer in a note also forecasted a 50 bps cut in 2024 with expectations for the Fed fund target range to reach 3.25 to 3.5 percent by May 2025.
«The Fed kicked off its rate normalization cycle with a larger-than-expected 50 bps rate cut, acknowledging that the need for restrictive monetary policy has diminished,» said Julius Baer chief economist David Kohl.
«Lower inflation projections and growth forecasts, as well as a higher unemployment rate projection, suggest that further rate reductions are on the agenda if the US economy continues to slow down at the expected moderate pace.»
Equities Receive a Boost
The consensus view is that equities will benefit from rate cuts. HSBC Global Private Banking maintained its overweight in US and global equities, according to a note, advising investors to target companies with earnings endurance.
«If there is no recession after the first rate cut, this, combined with the lower interest rates, boosts the stock market,» said VP Bank chief strategist Bernd Hartmann. «In all past five soft landings analyzed, equity markets not only performed positively, but also outperformed the long-term averages.»
Move Cash to Bonds
And on fixed income, private banks called for a shift out of cash and money market holdings.
UBS advised considering high-quality corporate and government bonds, highlighting that they recently showcased their value in cushioning volatility in equity markets. Standard Chartered in a note said that a less aggressive Fed path would likely lead to a rebound in bond yields and suggested investors «use any bounce in US yields, especially in the 10-year bond, towards 4 percent to lock in attractive income over a longer term».
Rate Path Not Fully Certain
However, there are still other factors that could influence the trajectory of interest rates, most notably the outcome of the November presidential election in the US.
«The upcoming US election is still a major risk for both the US Fed and Asia’s central banks, and Trump’s potential return to the White House is likely to bring easing in Asia and the US to a halt in mid-2025,» commented Homin Lee, senior macro strategist at Lombard Odier.
