Following the Federal Reserve’s latest interest rate decision to cut rates by 25bps, industry experts have shared their thoughts with IFA Magazine.
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments said: “The Fed delivered another 25bps cut today in their final policy-setting meeting of the year, as expected. The market was also expecting the dot-plot to show one less rate cut next year.
“Let’s see what the press conference brings us where there is likely to be some questions about the terminal rate potentially being higher. In terms of markets, equities have been consolidating recently and we expect them to rebound between now and the end of the year. Treasuries have been under pressure this month and this decision probably won’t draw a line under that just yet, but yields are interesting at these levels.”
Lindsay James, investment strategist at Quilter Investors said: “The Federal Reserve has moved to cut rates by 25bps, as was widely expected by the market. However, alongside this cut there were signals that the Fed will proceed with caution in 2025, with inflationary forecasts raised in the December projections.
“On the face of it, there is a conundrum in central banks that has led the Fed to this decision, despite core month on month CPI being stuck at 0.3% for four months in a row while GDP growth has remained strong.
“Meanwhile, the Bank of England is expected to hold rates at 4.75% tomorrow even though growth has slipped into reverse. UK GDP contracted 0.1% in each of the past 2 months, while core month on month CPI was 0% in November, down from 0.4% in October.
“So, why has the Fed cut while the Bank of England is expected to hold? When we pick over the inflation data, there are a few differences that offer some explanation. Firstly, while both economies are still facing wage inflation well above the target rate, productivity – a measure of output per worker – is far weaker in the UK and has largely flatlined since the pandemic whereas in the US it has shown strong gains. This makes wage growth more inflationary in the UK than the US, because higher wages lead to higher demand, but with no offsetting increase in supply causing the price level to move up.
“Another possible factor is that the Federal Reserve tends to act based on data prints, rather than considering forward looking signals from Donald Trump’s range of policy intentions which may or may not materialise. In being arguably late to cut in the first place, the Fed is also perceived to be playing a degree of catch up. However, investors had been braced for a more hawkish tone going into 2025, and that too has materialised. Potential inflationary pressures ahead including Trump’s tariffs, immigration controls and personal and corporate tax cuts are expected to see a shallower path of easing in future months.
“In the UK, there is the sense that the economy is slipping into stall speed, and there is an argument for a rate cut tomorrow to close out the year. However, the Bank of England has been particularly cautious about persistent wage inflation combined with weak productivity, with a single mandate being focussed on price stability. While its Deputy Governor Sir Dave Ramsden has argued that wage inflation is likely to be at the lower end of the 2-4% range next year, with other factors such as the recent Budget suggesting employers will be reluctant to see wage costs rise even further, the MPC are going to be under increasing pressure to act sooner rather than later.”
Salman Ahmed, Global Head of Macro & Strategic Asset Allocation at Fidelity International said: “The Federal Reserve (Fed) cut the Fed Funds Rate by 25 basis points (bps), as widely expected, bringing it to 4.5%. While Chair Powell acknowledged this was “a closer call” than previous meetings, he emphasised it was “the right call” given current conditions. This follows recent FOMC communication emphasising the merits of “gradual” policy normalisation, supported by resilient economic fundamentals and rising policy uncertainty with incoming President Trump.
“A significant modification to the statement language reinforces this measured trajectory. The incorporation of “the extent and timing of” signals a slower rate cut path ahead, with markets now pricing a 90% probability of a January pause, aligning with our assessment. Powell reinforced this message, noting that while policy remains restrictive, they are “significantly closer to neutral,” justifying a more cautious approach reflected in the reduction from four to two projected cuts in 2025.
“The Summary of Economic Projections (SEP) showed hawkish undertones as well. The 2025 dot removed two cuts, exceeding market expectations of just one less cut. This adjustment comes alongside stronger growth projections, higher inflation, and lower unemployment in 2025. Powell cited higher-than-expected inflation in September and October as “probably the biggest factor for new projections,” emphasising the need to see more progress on inflation before further cuts. Importantly, the committee’s assessment of the long-run neutral rate shifted higher, with the median moving from 2.9% to 3.0%, and the central tendency range moving up to 2.8%-3.6%.
“There remains a considerable amount of uncertainty about the economy and the policy path over the coming months owing to potentially quite significant changes to the outlook when President Trump gets into office and implements his plans on tariffs, taxes, spending cuts, and potential deportations. Powell noted that committee members varied in their incorporation of potential Trump policies in their projections, with some citing increased uncertainty in their dot plot assessments. As he put it, “when the path is uncertain, you go a little slower.” He also indicated the Fed stands ready to carefully assess policy responses once specific implementation details of proposed tariffs become clear.
“The Fed’s outlook now broadly aligns with our own expectations for 2025 and we will watch reflation (our current base case) as well as stagflation risks closely. We think odds for renewed rate hikes in the latter part of next year are rising.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley): “That the Fed reduced rates isn’t surprising at all. Interestingly the central bank now sees a more gradual pace of rate reduction. The Fed will likely cut interest rates further as inflation continues to normalise in the near term. But the central bank is likely to be much more cautious and even more data-dependent going forward. This is one of the reasons why we don’t expect a return to the ultra-low rates of the past decade prior to the pandemic.
“What’s more, high debt levels and the risk of inflationary flare-ups, driven by fiscal stimulus especially in the US, mean that the Fed will likely only reduce rates to more ‘normal’ levels of around 3.5% to 4% over time.
“With US fiscal policies potentially turning more inflationary, we’ve swapped shorter-dated US inflation-protected bonds for longer-dated ones, while remaining underweight US Treasuries.
“We think the US, supported by fiscal stimulus, is likely to remain resilient, while the Eurozone and the UK may lag, with the risk of trade tariffs creating a headwind.
“This divergence in growth suggests a strong US dollar in the near term, although the weight of US government debt could weaken it in the long term. We continue to favour a slight equity overweight and, within that, prefer US equities.
