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In an interview this week, Fed Chair Jerome Powell noted that it is likely going to take “longer than expected” to gain the confidence needed to lower rates, dashing hopes for more than two cuts in 2024. “This is confirmation that the Fed’s willing to wait it out,” said Diane Swonk, chief economist at KPMG LLP. “There’s concern of how little it took to stimulate the economy, that there’s still a lot of demand.” Similar sentiment has been echoed by Powell’s colleagues at the Fed. Boston Fed President Susan Collins said Thursday she saw less urgency to cut rates than she did just a few months ago because the job market has been stronger than anticipated and because easier financial conditions suggest interest rates might not be slowing the economy as much as thought. “The risks of monetary policy being too tight have receded,” she said. Recent inflation setbacks “also implies that less easing of policy this year than previously thought may be warranted.” The 10-year Treasury rate has sold off more than 40 bps over the month of April as the market reassesses its expectations for rate cuts this year. Bloomberg shows the current market probability of a rate cut in September and December at just over 40%, whereas all other Federal Open Market Committee (FOMC) meetings projected a lower probability. The Fed’s dot plot will not be updated until the June FOMC meeting, so until then, we’re left to read the tea leaves of Fed Speak.

How markets perform when interest rates are cut. Expectations have been building of a rate cut by the US Federal Reserve, particularly following the Jackson Hole symposium just over a week ago when policymakers, including Fed Chair Jerome Powell, signalled they were ready to act. Historically, markets have responded positively to rate cuts, but is the reaction likely to be favourable this time? Why the Fed is considering cuts now: Previous rate-cutting cycles were in response to economic downturns or financial crises. However, the Fed's current situation is different. Inflation has cooled, with US core CPI down to 3.2% – the lowest since April 2021. Meanwhile, unemployment remains relatively low, but there are signs of a softening labour market. The Fed appears poised to ease its restrictive stance not to accelerate the economy, but to strike a balance as it adjusts to more neutral policy settings. Market implications of rate cuts: Rate cuts generally provide a boost to financial markets. Stocks have historically performed well in the months following initial cuts, although the journey isn't always smooth. Investors can expect volatility, particularly as economic conditions shift and the market reacts to new data. What's different this time: This rate-cutting cycle is expected to be more gradual. Rather than large, crisis-driven cuts, the Fed may opt for smaller, 25-basis-point reductions. This cautious approach is in response to a complex mix of moderating inflation and still-strong employment figures. As a result, market rallies might not be as sharp as in previous cycles, but the ongoing adjustments should support a more sustainable path for growth. Key takeaway: Overall, the market's reaction to a potential Fed rate cut is likely to be positive, especially if the expected rate-cutting cycle is seen as a move toward a balanced policy rather than a response to a crisis. Investors should be prepared for opportunities and challenges as the Fed navigates this new landscape. For a more in-depth chat feel free to contact me directly. garethpowell@ippfa.com

Great article from our CIO, Brent Schutte. Brent highlights a critical shift in the Fed’s outlook that could shape market dynamics heading into 2025. This tempered approach to rate cuts reflects ongoing concerns about inflation’s persistence, but it also underscores the Fed’s commitment to balancing economic stability. For investors, this signals the need to stay adaptable—opportunities may arise in sectors resilient to higher rates or those poised to benefit from eventual easing.

Due to lingering concerns about inflation, the U.S. Federal Reserve is now predicting just two rate cuts in 2025, down from four. In Northwestern Mutual’s weekly market commentary, we discuss what the Fed’s latest forecasts could mean for the economy and investors.

My view on the Fed after the 50 bp cut to keep the economy strong published in @allnews (in French): https://bit.ly/4gDCjJx   . The Fed cut its key rate by 50 basis points (bp), starting a new phase of accommodative monetary policy. . This 50 bp cut does not reflect the Fed's lag in the economic cycle, but rather its commitment not to fall behind and to ensure economic growth close to potential, as well as a solid job market, while inflation gradually moves closer to the 2% target. The FOMC's forecasts confirm this outlook. . Like the Fed, the market is anticipating a terminal rate of 2.9%, corresponding to the neutral rate. The idea of a sharp slowdown or recession, which would lead to a terminal rate below the neutral rate - a hypothesis that the market was still considering a few weeks ago - has been ruled out. . The level of this neutral rate, expected at 2.9% or 0.9% in real terms (r*), remains contested. The average from the two main r* models suggest a real neutral rate of 1.7%, implying a nominal neutral rate of 3.7%. It seems then that the market is expecting three too many of the eight cuts it is anticipating. . In practice, the Fed is rightly not going to rush to a neutral rate, the level of which remains highly uncertain, but will favour a gradual approach in order to identify it . Following another 50 bp cut between now and year end, further monetary easing will be spaced out to continue to assess the impact of past restrictive measures, in particular their transmission to economic activity and inflation, to observe the effects of the first rate cuts, and to take account of the policies of the new administration - whether Republican or Democrat - which are likely to worsen the fiscal deficit. Against this backdrop, market expectations of 8 rate cuts out of the next 9 Fed meetings seem clearly exaggerated . The market's expectations of a terminal rate being too low and reaching it too quickly may be unrealistic, making bond markets less attractive

The Fed’s first 2025 meeting held rates steady but signaled a hawkish stance, removing “progress on inflation” from its statement. This leaves markets questioning whether this is a pause or just a skip in the easing cycle. With inflation risks rising and the Trump administration’s economic agenda adding uncertainty, the Fed faces a complex balancing act. Investors should stay nimble, focus on the front end of the curve, and watch for clarity from the March meeting.

Chart Of The Week A client asked how markets perform when interest rates are cut. Expectations have been building of a rate cut by the US Federal Reserve, particularly following the Jackson Hole symposium just over a week ago when policymakers, including Fed Chair Jerome Powell, signalled they were ready to act. Historically, markets have responded positively to rate cuts, but is the reaction likely to be favourable this time? Why the Fed is considering cuts now: Previous rate-cutting cycles were in response to economic downturns or financial crises. However, the Fed's current situation is different. Inflation has cooled, with US core CPI down to 3.2% – the lowest since April 2021. Meanwhile, unemployment remains relatively low, but there are signs of a softening labour market. The Fed appears poised to ease its restrictive stance not to accelerate the economy, but to strike a balance as it adjusts to more neutral policy settings. Market implications of rate cuts: Rate cuts generally provide a boost to financial markets. Stocks have historically performed well in the months following initial cuts, although the journey isn't always smooth. Investors can expect volatility, particularly as economic conditions shift and the market reacts to new data. What's different this time: This rate-cutting cycle is expected to be more gradual. Rather than large, crisis-driven cuts, the Fed may opt for smaller, 25-basis-point reductions. This cautious approach is in response to a complex mix of moderating inflation and still-strong employment figures. As a result, market rallies might not be as sharp as in previous cycles, but the ongoing adjustments should support a more sustainable path for growth. Key takeaway: Overall, the market's reaction to a potential Fed rate cut is likely to be positive, especially if the expected rate-cutting cycle is seen as a move toward a balanced policy rather than a response to a crisis. Investors should be prepared for opportunities and challenges as the Fed navigates this new landscape. We see opportunities in small caps and infrastructure, which are sensitive to interest rates and likely to benefit from cuts. These are asset classes we’re reviewing. It’s worth noting that, through our single-strategy funds, Marlborough has real strength in these areas. W1 Investment Committee - Nathan Sweeney, Chief Investment Officer 

Did markets force Powell’s hand? 🤝 Jay Powell just cut the benchmark interest rate by a hefty half-point to 4.75-5%, kicking off the first easing cycle in over four years. The move is seen by many as bold and somehow, gutsy. Powell is clearly aiming for a "soft landing" for the economy, balancing a strong labor market with easing inflation. 🛬 Interestingly, market pricing had hinted at the possibility of a 50bps cut, but most economists were caught off guard. Only 9 out of 113 economists in a Bloomberg survey expected such a significant cut. This was accompanied by a substantial shift in the Fed’s projections for future rates, dropping the median expectation for the end of 2024 and 2025 by 75 basis points. 📉 This isn’t unprecedented, but it’s unusual without an obvious crisis driving the change. What really stands out is how the markets initially reacted with excitement, pushing the S&P 500 above its previous all-time high, only to close down for the day. This turnaround reflects a recalibration of future expectations. Powell emphasized that this cut was a "catch-up" move, not the beginning of a new pace of rate reductions. ✂️ He aimed to present this as a "focused 50, not a fearful 50," signaling strength rather than weakness. In short, he said “we’re doing it, because we can”. What’s your take? Was this the right move? 👀 Has the Fed gained credibility? Or did markets force Powell’s hand? Drop your thoughts below! 👇 PS. If you made it this far, ♻️ share with your network and 🔔 subscribe to my profile.

Here are five key takeaways from the Federal Reserve’s July meeting and Chair Jerome Powell’s press conference on Wednesday: Powell laid the groundwork for a September move to lower interest rates but has left himself some room to divert if the data doesn’t go according to plan. While there were no explicit signals, his positive takes on falling inflation and a normalizing labor market will reinforce Wall Street expectations for a September decision. The Federal Open Market Committee discussed the possibility of cutting rates at this meeting, Powell said in response to press questions. The committee had “a nice conversation” on the possibility and “a strong majority” supported keeping rates steady this time. While not ruling anything out, Powell suggested a 50 basis-point move isn’t planned. Powell said decisions on monetary policy are a “very difficult judgment call,” and he laid out scenarios for everything from cutting several times this year to no cuts at all. If inflation moves down in line with expectations, growth remains reasonably strong, and the labor market remains consistent with its current condition, a rate cut could be on the table in September, he says. Powell’s comments were more dovish than the changes in the FOMC statement. He said upside risks to inflation have come down as the labor market has cooled off. While recent anecdotal data have been mixed, he continues to expect a soft landing for the economy. Powell’s comments extended a rally in stocks, pushing the S&P 500 toward its biggest advance since February. Treasury yields were down across the curve and the dollar slipped against all of its developed-market peers. Traders continued pricing in a minimum of two rate cuts this year. Steve Mathews – Fed Reporter

After a strong start to the year, market volatility seems to have returned. While we would expect market volatility to continue near-term, we are also watching for key inflection points that may indicate the early innings of a more sustainable rally ahead. We highlight three potential conditions that we believe would support better market returns longer term: 1) inflation moving lower, 2) the Federal Reserve pausing its rate-hiking cycle, and 3) earnings revisions bottoming.