Isaac Stell, Investment Manager at Wealth Club said: In a highly anticipated meeting, the Fed chose to ease rates in an effort to support a weakening labour market. The move comes against a backdrop of intense political scrutiny, with both Chair Jerome Powell and Governor Lisa Cook facing sustained rhetorical and legal challenges making today’s decision feel all the more political. The justification behind the cut focuses on employment rather than inflation. The labour market has been deteriorating more rapidly than expected, with the unemployment rate recently reaching its highest level since October 2021. Despite inflation remaining comfortably above the Fed’s target, signs of strain in the jobs market were compelling enough to prompt action. However, the decision is unlikely to satisfy the President who made it publicly known he expected a “big cut”, not the 0.25% the Fed has opted for today. Unfortunately, the timing and circumstances of today’s move make it appear more like a concession rather than a strategic policy shift, potentially fuelling concerns about the Fed’s independence.”
David Rees, Head of Global Economics at Schroders, said: "The Fed’s decision to press ahead with interest rate cuts at a time when the solid economy is close to full employment raises the risk of higher inflation becoming ingrained. "We now think that the Fed will deliver another two 0.25% cuts by the end of 2025. But rates are unlikely to fall further from there, as solid growth drives a rebound in labour market activity and causes inflation to rise. As such, we continue to believe that market expectations of rates going below 3% are too aggressive."
George Lagarias, chief economist at Forvis Mazars commented: "The rate cut delivered was fully expected. Markets had already discounted it, and are pricing in two more before the end of the year, despite a worsening inflation outlook. The questions for investors were two: a) will the Fed deliver two more cuts or are the markets too optimistic and b) to what extent is the US central bank still acting independently? For the time being, only one dissent in the meeting suggests that the Fed remains independent and markets are celebrating the relative harmony. So are two more cuts too optimistic? Not necessarily. The Fed seems poised to weigh growth and employment over inflation concerns. Having said that, it must be acknowledged that inflation pressures are becoming more pronounced. Investors should not rule out a change of course if inflation accelerates at a faster pace than expected."
Rob Agnew, Head of Isio Private Office, comments: “The Trump administration’s push for the Fed to lean harder on growth could have far-reaching implications. The immediate aim is clear: stimulate economic growth, boost equity markets, and lower financing costs for U.S. firms. All else being equal, this should provide an uplift to asset valuations, which is positive for private capital and equity exposures. While markets expected a 25 basis points cut, the Fed’s dovish forward guidance could deliver a short-term boost. However, this strategy carries significant risks. Inflation is the obvious concern, but if growth fails to materialize – perhaps due to tariffs or trade wars slowing global growth – we could face stagflation, which is notoriously difficult to manage, as history in the 1970s shows. It’s also important to note that reducing base rates doesn’t automatically lower interest rates across the curve. Inflation expectations and market risk perceptions could offset the cuts, meaning the benefits for corporate America – cheaper debt issuance – and for consumers, such as lower mortgage costs, may not materialize. Finally, there are risks in the bond markets. The U.S. currently holds an AA+ credit rating, and Treasuries are considered the ultimate flight-to-quality asset, allowing the government to issue debt freely. But with the debt ceiling raised and significant new issuance expected, the yield curve could steepen further. Worse still, a downgrade of U.S. credit would put upward pressure on long-term borrowing costs. These dynamics could have systemic implications, as Treasuries underpin much of the financial system, and could particularly strain small to mid-sized U.S. banks. This period of instability has an unsettling impact on both family and endowment investment portfolios. It’s never been more important for investors to understand their exposure, query their approach and not assume that their wealth manager will act in their best interests.”
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