Richard Schmidt
November 7, 2024
Key takeaways
- The target for the federal funds rate has been cut to 4.5-to-4.75%.
- Expect one more 0.25% cut in December and additional cuts in 2025.
- In portfolios with a tactical asset allocation overlay, we’ve returned to a neutral equity position.
Following its ‘jumbo-sized’ September rate cut, the U.S Federal Reserve (Fed) trimmed its target for the federal funds rate by a tamer 0.25%. This brings the target to 4.5-to-4.75%, a move that was widely anticipated by market participants and unanimously voted for by members of the Federal Open Market Committee.
Interestingly, the Fed removed language about gaining greater confidence that inflation is moving sustainably towards its 2% target from its statement. It did, however, maintain that “the risks to achieving its employment and inflation goals are roughly in balance.” This is all consistent with this month’s smaller rate cut.
The Thursday announcement comes hot on the heels of former President Trump winning the 2024 U.S. Presidential election and exuberant financial markets hitting new record highs in anticipation of corporate tax cuts and deregulation.
We anticipate another small cut in 2024
From the Fed’s statement, “Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.”
Despite the conclusion of the election, new uncertainty has been injected into the economy and financial markets. Somewhat predictably, Fed Chair Powell refused to engage in questions about the economic implications of the Trump/Vance administration and how it would impact the Fed’s decision-making process.
All this in aggregate means that the door should still be open for one more 0.25% cut before the end of the year and additional easing in 2025.
Opportunity and risks are roughly in balance
In portfolios with a tactical asset allocation overlay, we recently increased our allocation to equities overall, returning our tactical equity allocation to a neutral position relative to fixed income and cash. The benefit of a more defensive position diminished as most central banks started to cut interest rates, easing conditions.
More recent economic revisions show a stronger backdrop for growth in the U.S. and the anticipation of more proactive stimulus in China reduces risks to the global economy. The aftermath of the U.S. election, other geopolitical risk, and still weaker growth out of the Eurozone may still present some headwinds.
On the fixed income side, as we expect interest rates to come down further, we remain long duration (more interest rate sensitivity) as we expect short-term yields to continue to fall in absolute terms and relative to longer-term yields.
For more information about this announcement or your portfolio, please contact your MD Advisor*.
The Fed’s next interest rate announcement is scheduled for December 18th and will be accompanied by the latest Summary of Economic Projections.
Richard Schmidt
Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.
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