In Fed We Trust
Stephanie Leung
Chief Investment Officer at StashAway | Digital Wealth Management | Business Founder | Venture Investor and Advisor | Public Speaker | Web3Women | Tatler Front & Female | Goldman Sachs | McKinsey
The Fed just concluded its latest meeting with a 50bps cut, officially kicking off the rate-cutting cycle.
What's most notable from this Fed meeting, though, wasn't the 50bps rate cut, but the fact that the median voter at the Fed clearly shifted their concerns from inflation to growth (See chart below showing the Fed's shift in risk assessments), and that they clearly wanted to telegraph to the market that they are ahead of the curve (the market was pricing in a 50/50 chance of a 50bps vs 25bps cut prior).
As such, without any clear signs of a recession, the Fed started the rate-cutting cycle with a bang - the other 2 times that the Fed started a rate-cut cycle with 50bps were in Sept 2007 and Jan 2001, and the last time Powell delivered a 50bps cut was in March 2020. Needless to say, today there's no crisis, credit spreads are snug as a bug, and the S&P is trading at an all-time high!
What happened in 2007 offers an interesting comparison. The Fed started cutting in Sept 2007 - the housing market was starting to struggle and the Fed was worried. They started the cycle with 50bps, over-delivering on market expectations. Equity markets applauded, and commodities embarked on a rally. This exuberance rekindled inflation fears by 2008, prompting the Fed to hit the pause button. Shortly after, Lehman collapsed and the rest was history.
Today, we don't have a brewing crisis, but with a Fed that's determined to stay ahead of the curve, the left-tail risk of a recession is significantly lowered (at least for the next 6-9 months). In addition, global liquidity has started to trend up, and the Fed could end its QT program in the next few months. On the flip-side, however, the risk that inflation might make an encore in late 2025 is now also higher. For now though, the probabilities tilts towards staying in an 'Inflationary Growth' regime.
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Here are my quick takes on asset class implications:
The Fed put is now live and would remain in place as long as inflation is perceived to be under control. With cash rates falling, that should also push more money into equities and other dollar alternatives - recent moves in Gold and Bitcoin are notable in that sense, and should continue to be the major trend as we await the next proud occupant of the White House.
As Druckenmiller says, Being an optimist about life and about things in general is a great attribute to have as an investor. You just can't be starry eyed and naive.
Stay the course!
EM FX & Rates Trader
5 个月political decision? to start with a 50 bp cut usually due to recession or credit crisis? Finding Nick of WSJ to move the market from implying 20% chance rate cut to 55% over a weekend. For investors, i think difference isn't that big but can sense the decision is mainly due to politics or pressure from Yellen. That being said, I think they could have started to cut 25 bp in July originally. Look at last speeches by Waller and Williams after August NFP figure. They tend to prefer 25 bp but Jay chose to turn the market around upside surprises of CPI and PPI. I bet Jay already instructed Nikileak to turn the Fed fund futures market around when Jay saw upside surprises of PPI before article coming out after CPI data. Bowman was more reasonable. If the economy is that bad, they would have done 50/50/25. Instead, FOMC chose 50 bp cut to start with then 25/25 on dot plot. I would say this 50 bp cut instead of 25 bp is a pure political decision. Usually multiple articles from Nikileak to say that starting with a 50 bp cut wasn't a big deal seems nothing related to growth concern (or minimal I should say).
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5 个月Good insights, Stephanie !
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5 个月Stephanie Leung Great insights! With the Fed shifting its focus from inflation to growth concerns, how do you think this rate cut will affect the long-term performance of equities and bonds? Curious to hear your thoughts on any particular asset classes that could benefit most from this pivot.
Attended ESCP Business School
6 个月Great advice