Fed disappoints on rate cut talk as Labour presses ahead with green investment -update from Quilter’s Lindsay James

by | Jul 10, 2024

Commenting on the latest UK economic news as well as that from across the pond, Lindsay James, investment strategist at Quilter Investors, said:

“Fed Chair Jerome Powell made his semi-annual testimony on the Monetary Policy Report to Congress yesterday, an event closely watched by investors for dovish signs that could be suggestive of coming rate cuts. In the event, his tone was fairly balanced, which was a source of disappointment to some given the market had moved to price in two rates by year end even though the dot plot (the interest rate expectations of voting participants as published by the Fed) suggested only one.

“Powell placed emphasis on needing ‘greater confidence’ that inflation was moving back towards target but also acknowledged the risk of leaving interest rates high for too long, pointing to cooling labour market conditions and the risk of unduly weakening economic activity. Overall short term bond yields ended the day little changed as a result. With the Fed’s preferred measure of inflation, core PCE inflation, now providing a more reassuring message with the most recent reading at 2.6% on an annual basis and 0.1% month on month, down from 0.3% in April, this together with the signs of a cooling economy mean that investors’ expectations of two rate cuts by close of the meeting on 18th December are reasonable. The timing of rate cuts could however be clouded by the Presidential election on 5th November. The Federal Reserve will be keen to show impartiality which could be taken as precluding any move in rates in the meeting prior to this or indeed at the 7th November meeting.

“In what is also a busy week for the new UK government, further detail was published on the National Wealth Fund, a £7.3bn fund designed to crowd-in private investment to strategic areas of interest that are seen as helping meet the UK’s green agenda. With funds dispersed under the umbrella of the UK Infrastructure Bank, for pragmatic purposes of speed, its focus will be on providing equity, debt or loan guarantees to low carbon projects such as gigafactories, green steel and industrial decarbonisation in a way that then unlocks larger scale private investment into these areas. This is an ambitious approach to overcome what are major challenges.

“Gigafactories – factories that produce batteries for EVs and for grid-scale storage – face significant international competition and unfavourable economics, while other focus areas such as industrial decarbonisation face multiple blocks from high capital costs to access to renewable energy and delays from the grid connections that can run to 12 years. However, with the focus being on using the pool of capital to provide a more attractive landscape for private investment, the approach creates an opportunity that would otherwise be wholly absent with a limited financial commitment.”

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