The U.S. Federal Reserve's decision to cut interest rates by 25 basis points on Wednesday has been widely expected and shouldn't surprise anyone. But whether the central bank has done enough to revive growth in the United States continues to be the focus of many heated debates among market participants.
The Federal Reserve and Chair Powell sent a pretty strong signal that they believe they are done with the rate cuts for the time being. That their three moves toward lower interest rates accomplishes their so-called mid-cycle adjustment. And like 1995 and 1998 when insurance cuts were implemented, they can now move to the sidelines for a prolonged period of time. There’s certainly a lot of reasons why one might want to move to the sidelines right now, geopolitical risk tensions look better, global growth looks like it’s levelling off… but might reaccelerate in the future, and financial conditions remain very light and easy, with equities continuing to accelerate, and the U.S. dollar staying relatively rangebound.
But in our view, the Fed is going to be forced reluctantly to cut again, as early as March though possibly a little bit later. Our concern is that the manufacturing recession that these first rate cuts were implemented to guard against bleeds into the services sector and particularly into jobs. Now Chair Powell told us that he’s not against rate cuts, he said that if developments occur that change their outlook, they will respond. Although he didn’t exactly outline what he was looking at in order to cut again, our strong suspicion is that if the jobs market continues to deteriorate, that would be enough for the Fed to pull the trigger again. Bigger picture as we think about the Fed cutting and then “holding”, some might be questioning—will we see rate hikes again in the near future? But our forecast doesn’t call for rate hikes for a multi-year period because, well, there isn’t enough inflation available in order to justify Fed hikes. From that bigger picture perspective, it implies that rates are going to be low, and stay low for a very long time. That’s more important to us than whether or not we see 25 basis points or more of cuts ahead in the next six months. The true story is that we are in a low growth, low inflation environment that hinders the Federal Reserve’s ability to normalize interest rates over the long run.