Fed expected to Pivot… and most economies to follow as usual!

We expect the Fed rate cut cycle to start soon and proceed gradually. Barring a financial crisis or a sharp and unexpected change in the path of inflation or unemployment, the upcoming rate-cutting cycle won’t be dramatic; we expect the Fed to make incremental, 25 bps cuts to its policy rate.

Higher interest rates have meant higher borrowing costs for consumers and businesses.

• The 30-year mortgage rate stands at about 6.9% as of July 2024, a massive jump compared with the 3.0% average in 2021 and far above the 4.2% average in the prepandemic years (2017 to 2019).

• Mortgage rates reached a high of 7.8% in November 2023, the highest in over 20 years.

Moreover, the Fed is going to stay highly data dependent and will calibrate accordingly. Overall, this is a rather positive scenario for risk assets. Still, equity market valuations are becoming rich, especially in developed markets. Consequently, we keep our neutral stance on equities.

We are upgrading all currencies (EUR, CHF, CHF, JPY, EM currencies) back to neutral vs USD (from Negative). Technicals have turned against the US dollar and the Fed has sent a clear signal about coming rate cuts.

How Does Inflation Affect Interest-Rate Projections?

According to Morningstar, inflation is expected to fall to normal levels after peaking at 6.5% in 2022.

We still think most of the sources of high inflation since the start of the pandemic will abate (and even unwind in impact) over the next few years. This includes energy, autos, and other durables. Still, supply chains are healing as demand normalises and capacity catches up. These factors drove inflation down to 3.8% in 2023, and we expect the rate to fall further to 2.4% in 2024, with an average of 1.9% from 2024 to 2028.