Market observers say the U.S. is unlikely to cut interest rates significantly. They said that the Federal Reserve cut interest rates sharply by 50 basis points in September, kicking off the easing cycle, but subsequent interest rate cuts will be more moderate. They highlighted a better-than-expected September jobs report, renewed concerns about inflation, rising yields and a still relatively strong economy. Paul Christopher, head of investment strategy at Wells Fargo Investment Institute, said the Fed “really isn’t ready to cut interest rates as sharply as the market had priced in.” “I think if you go from half a percentage point down in November to a quarter percentage point hike, it’s not a big deal, but it does require some market adjustment. December and January rates There may be some adjustments expected as well,” he told CNBC’s “Squawk Box Asia” earlier this month. Adam Coons, co-chief investment officer of Winthrop Capital Management, said the U.S. economy has “still not shown enough deterioration to justify aggressive cuts/stimulus measures.” According to CME Group’s FedWatch tool, the probability of a 50 basis point rate cut is 0%, down sharply from 36.8% in early October. On the other hand, the probability of a 25 basis point rate cut at the November meeting is now 86.8%, up from 63.2% in early October. Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, said inflation – the driving force behind the Fed’s easing policy – may not taper off as expected. He expects overall consumer prices to accelerate again in early 2025. “We see only 25 basis points of cuts in November and December. We don’t think CPI will start to accelerate significantly until the December headlines come out in early 2025,” Landsberg said, citing strong employment data and employment data and other factors. Landsberg said that in this case, it is important for investors to still hold commodity exposure as inflation is expected to remain sticky. According to him, this includes gold and real estate. Wells Fargo’s Christopher said the market performance will expand further if interest rates are moderate and earnings are stronger than expected. He added that he is more bullish on cyclical stocks and has recently increased his holdings in them as the U.S. economy is expected to grow further next year. This means industry, materials, energy and finance. In fixed income, investors have flocked to money market funds and short-term Treasury bills over the past few years due to higher yields. For now, cash flow continues to flow into such instruments despite falling interest rates, noted Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute. “We expect the rate cut to be smaller than market expectations, targeting 1% in 2024 and 0.75% in 2025,” he wrote in a recent report, “but this would still be a significant decline from current levels.” In summary, this means investors who are used to returns above 5% on cash alternatives are unlikely to enjoy such returns over the long term. “We favor a reallocation of excess cash or cash alternatives by investors in the face of a Fed rate cut cycle and falling interest rates,” Alvarado said. “We favor a reallocation into longer-maturity fixed income.”
