U.S. interest rate cuts are unlikely to move at an aggressive pace, say market watchers. The Fed kicked off its easing cycle with a jumbo 50 basis-point rate cut in September — but subsequent ones will be milder, they said. They highlighted the better-than-expected September jobs report, renewed worries around inflation, rising yields and an economy that’s still relatively strong. Paul Christopher, head of investment strategy at Wells Fargo Investment Institute, pointed to a Fed that’s “just really not ready to cut quite so aggressively as the markets had previously priced.” “I think if you take November from a half a point down to a quarter point hike, that’s not really a big deal, but it does require some adjustment in markets. There may be some adjustments to rate expectations for December and January as well,” he told CNBC’s ” Squawk Box Asia ” earlier this month. The U.S. economy “still does not show enough deterioration to justify aggressive cutting/stimulus,” said Adam Coons, co-chief investment officer at Winthrop Capital Management. According to the CME Group’s FedWatch Tool , odds of a 50-basis-point cut are at 0%, drastically down from 36.8% at the start of October. On the other hand, odds of a quarter-point cut at the November meeting are now at 86.8%, up from 63.2% at the start of October. Inflation – the driving force behind the Fed’s easing policy – may not taper as much as expected, according to Michael Landsberg, chief investment officer of Landsberg Bennett Private Wealth Management. He expects headline consumer price index to re-accelerate in early 2025. Headline inflation rose 0.2% month on month in September, slightly higher than the market’s expected 0.1%. “We see only 25 basis points of rate cuts in both November and December. We think CPI will not start to meaningfully accelerate until the December headline print which will be reported in early 2025,” Landsberg said, citing factors such as strong jobs data and strength in the economy. How to position In that scenario — and with inflation expected to continue being sticky, it’s important that investors still have exposure to commodities, said Landsberg. That includes gold and real estate, according to him. Christopher of Wells Fargo said if interest rates moderate and earnings are stronger than expected, market performance will broaden out further. He added that with additional growth anticipated in the U.S. economy next year, he prefers and has added to cyclical stocks recently. That means industrials, materials, energy and financials. In the fixed income space, investors have in the past few years flocked to money market funds and short-term Treasury bills because of higher yields. Currently, the flow of cash into such instruments has continued despite falling rates, noted Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute. “We expect less rate cuts than the market, with our targets implying a 1% decrease in rates for 2024 and 0.75% in 2025, but that still would represent a significant decline from current levels,” he wrote in a recent note. That means investors used to returns of more than 5% on cash alternatives are unlikely to enjoy that for long, he concluded. “Our preference is for investors to reposition excess cash or cash alternatives in the face of a Fed rate-cutting cycle and falling interest rates,” said Alvarado. “We favor reallocating into longer-maturity fixed income.”
