The U.S. Federal Reserve continues to wait, first cut is likely close

Richard Schmidt

July 31, 2024

Key messages

The target for the federal funds rate remains at 5.25-to-5.5%.
Pushing cuts out, the Fed expects a single 0.25% cut in 2024, followed by four 0.25% cuts in 2025.
Fed says, “Inflation has eased over the past year but remains somewhat elevated.”

Members of the Federal Open Market Committee (Fed) unanimously voted to hold the target for the federal funds rate at 5.25-to-5.5% coming out of its July meeting. While far from a victory speech, the Fed’s statement on inflation was once again upgraded, from “remains elevated” to “remains somewhat elevated” and that it sees “some further progress” toward its 2% inflation objective, raised from “modest further progress.”

Market participants remain convinced that the Fed will cut interest rates at its next meeting in September. We are aligned with this expectation. As a reminder, the Fed’s latest projections indicate a single cut this year, down from two, followed by four cuts in 2025, up from three.

More waiting and seeing for the Fed

As I mentioned last month, the resilient U.S. economy does not face the same pressures and urgency to lower borrowing costs when compared to the Bank of Canada, which pushed through its second rate cut earlier this month. From the Fed’s statement, “recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low.”

At the same time, the Fed reiterated that “the risks to achieving its employment and inflation goals continue to move into better balance.”

Uncoincidentally, there will be two more Consumer Price Index (inflation) readings before the Fed’s September meeting, which could provide the ammunition needed to convince the Fed that inflation is indeed moving sustainably towards its target.

Opportunities in the current environment

We’ve maintained our overall neutral view in equities, with a preference for North American equities. Canada’s ranking in our analysis is improving due to better macro conditions and the boost the rate cuts will provide. The U.S. remains remarkably resilient and relatively sheltered from Chinese and European weakness. It also continues to ride the artificial intelligence, cloud computing and energy transformation wave. Inflation and concentrated markets remain the key risks to monitor.

On the fixed income side, as we expect rates to come down in the short term, there is an opportunity to add value with duration exposure (more interest rate sensitivity) on the front-end of the Canadian bond yield curve. At this time, we remain of convinced that short-term yields will continue to fall in absolute terms and relative to long-term yields.

You can read more about our short- and long-term outlooks and how we position portfolios here.

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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