Comments made by the US Fed chairman that suggest limited further scope for rate cuts in 2025 went down badly with equity markets, judging by price action mid-week. Wealth managers consider the outlook.

The US Federal Reserve’s Open Market Committee voted this week by 11 to 12 in favour of cutting the central bank’s main interest rate to a range between 4.25 per cent and 4.5 per cent, the lowest in two years, and the third cut in a row. 

US stocks fell on Wednesday; the Dow Jones Industrial Average sank by 1,100 points yesterday in reaction to comments from Fed chairman Jerome Powell that suggested the room for further reductions is limited. Other indices fell. The fact that markets responded in this way may be a sign of how equity valuations may be in part dependent on views of further easing, which is not particularly reassuring. The Fed may note that, with tariff hikes coming under a Trump presidency, and domestic measures to boost growth, that there could be some inflationary impact. What seems clear is that a return to near the ultra-low rates post-2008 is not likely. (Editor’s note: that is a good thing.)

Here are reactions from wealth and asset managers:

Preston Caldwell, chief US economist at Morningstar
The Fed is setting the stage for the possibility of few (or even zero) additional rate cuts in 2025 and 2026. Fed Chair Jerome Powell noted that the federal-funds rate is now “significantly closer to neutral”, although it likely remains still “meaningfully restrictive.”

There is much uncertainty about precisely where the neutral rate is located. GDP growth has remained strong despite the Fed’s high interest rates. Inflation is also not quite back to target. The Fed is virtually certain to slow the pace of rate cuts in 2025, in order to better gauge the effects of monetary policy in real time.

"The Fed didn’t noticeably increase its GDP forecast, so expectations of higher inflation can’t be attributable to expectations of a hotter economy. Instead, it is likely that the Fed is beginning to incorporate the possibility of inflation-boosting policy changes in 2025, most notably higher tariffs.

Although market expectations were already more hawkish than the Fed going into today’s meeting, the upward revision in the Fed’s expected federal-funds rate for end-2025 compelled an upward revision in the market’s own expectations. The market is now even incorporating a 60 per cent probability that the federal-funds rate target range is at 4.25-4.50 per cent or higher at the end of 2025, meaning no net rate cuts in 2025.

Rick Rieder, BlackRock chief investment officer of Global Fixed Income  
To us, this suggests that we’ve entered a new phase of the rate cutting cycle. In fact, we now enter a period that may be quite different than the prior couple of quarters. This is because the Fed has rightly reduced the Funds Rate down to the 4ish per cent level, which still may be moderately restrictive, but is also much more in line with an inflation rate that is running in the low-to-mid 2 per centish range today, by many measures. We have often argued that the more elevated [Fed] Funds rate creates great pressure on lower income cohorts through the housing, credit card, and auto finance channels than is worthwhile at this stage, particularly given where inflation has decelerated to.

President-Elect Trump has suggested that his first plan of action is to focus on illegal immigration, which is consistent with his stated campaign objectives. That said, legal immigration has been a major influence on hiring in the United States over the prior few years, to the tune of an estimated several million people hired, and it’s very much been at the heart of solving some major US employment deficiencies in areas such as restaurants, hotels, airlines, education, healthcare, etc. 

Thus, some clear slowing, and potential reversal, of this trend could have tangible implications for employment from here, as well as potential wage pressure, depending on the scope of these immigration directives.

In addition, actions related to tariffs, trade, and potential strategic global decoupling could have a significant near-term influence on inflation, and maybe longer-term impacts on growth, depending on how they are implemented. In advance of this, there will be some inventory building in some areas of the economy, which we are already witnessing. 

Seema Shah, chief global strategist at Principal Asset Management
“The decision to cut rates today is not a surprise in itself. But, considering the significant revisions to the projections, it does suggest that this was a reluctant reduction – one designed to give markets a bit of comfort as the Fed lays the groundwork for a more hawkish approach to policy in 2025.  

Certainly, the economic and inflation backdrop is not one that screams a need for meaningful policy stimulus, while the incoming administration may give them a severe inflation headache next year. The bias should still be further monetary easing, but caution and patience are clearly required at this stage.

Dan Siluk, head of global short duration and liquidity and portfolio manager, Janus Henderson Investors
The Fed seems to have switched back to prioritizing inflation risks over unemployment, readying for a January skip and potentially an extended pause in 2025, if inflationary pressures persist and the economy remains robust.

Six participants now see the long run rate at 3.5 per cent, up from 4 in September, and zero from two years ago – this highlights the Board’s view that the “neutral” rate is higher and that we are in a structurally higher inflation and rates environment.

Lindsay James, investment strategist at Quilter Investors
The Federal Reserve has moved to cut rates by 25 bps, 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 [consumer price index]  being stuck at 0.3 per cent for four months in a row while GDP growth has remained strong.