Later this week, the US Federal Reserve, Federal Open Market Committee (FOMC), will reveal how much they will cut benchmark interest rates. This is the first time the Fed will cut rates since 2020. The debate on the rate cut has shifted to whether or not it will be a 50 bps or 25 bps reduction. Some anticipate total cuts for 2024 will hit 100 bps.
The data driving the Fed’s decision has been decidedly mixed. Inflation remains above 2% – its target rate, and employment remains strong while showing signs of softening. Can the US Central Bank nail a “soft landing”? Again, there are arguments on both sides about whether this will be the outcome. We will know better tomorrow.
Isaac Wheeler, head of balance sheet strategy at Derivative Path, believes it is more important to focus on what happens in the coming months after this week’s cut.
“While the Fed’s anticipated rate cut is noteworthy as it finally delivers on the market’s long-awaited (and occasionally premature) forecast, our focus is on the Fed’s anticipated actions over the next twelve months. The market has priced at a sub-3% policy rate by the end of 2025, a target that, in our view, sets a high bar- requiring both slow growth and inflation to hover in the low 2% range. That pricing presents a meaningful opportunity for depositories exposed to a “higher for longer” scenario. As a result, we expect continued client interest in hedging strategies that lock in funding costs and swap fixed-rate assets to floating. Likewise, our depository clients are seeing rising loan demand from clients, driven by the drop in long-term rates and borrower focus on Fed headlines. Beyond the magnitude of this first rate cut, our focus will be on any signals from the Fed Chair regarding the path of rates over the next year.”
While lower rates mean the costs of money is cheaper and borrowing should pick up, what about all the people parking cash in high interest rate accounts – some generating over 5%?
Dave Koch, Director of Abrigo Advisory Services, advises individuals to manage deposits carefully. He advises investors to “use longer-term home loan bank advances or longer-term brokered CDs to ensure stability.”
“I expect earnings pressure on bank margins over the next year because falling rates will impact asset yields quickly, and it will be harder to move down the cost of funds given liquidity concerns.”
Chief Economist at BIT Mining Limited (NYSE: BTCM) Dr. Youwei Yang says the coming cut will significantly influence global liquidity. A larger cut could inject more liquidity in the market which could drive the price of Bitcoin higher.
The question is when this effect might materialize, as liquidity takes time to permeate the market, even for speculative investments. Conversely, gold has recently decoupled from Bitcoin after a period of correlation, likely serving as a hedge against the risk of economic recession amid concerns about the labor market and consequent economic recession.”
He says that the Nasdaq and S&P 500 have displayed stable growth which reflects “cautious optimism in equity markets.” But an aggressive cut could drive investors to alternative assets like crypto. At the same time, a smaller cut could lead to market declines.
As for my $0.02 (for what is worth), my money is on a 25 bps cut with a Dovish tone. Fed-speak is another way the Central Bank manages the market and there is plenty of time to cut rates further in 2024. Keep the powder dry.