Top of main content

Special Coverage: Fed begins to pivot to discuss rate cuts

2 Feb 2024

Jose Rasco

Chief Investment Officer, Americas, HSBC Global Private Banking and Wealth

Michael Zervos

Investment Strategy Analyst, HSBC Global Private Banking and Wealth

Key takeaways

  • As expected, the Fed left rates unchanged at 5.25-5.5% for a fourth straight meeting.The press statement from the FOMC reined in expectations for a March rate cut and Powell further explained that he thinks a cut at the next meeting is unlikely, as Fed officials really want to see a continuation of the good inflation data they've seen lately.

  • We still believe that the FOMC will begin to cut policy rates in the second quarter of this year, starting June, and will do so three times, lowering the Fed funds rate by 0.75% before year-end.

  • We remain bullish on Treasuries and maintain medium-to-long duration. In the credit markets, we prefer investment grade with a focus on quality. For equity investors, the recent rally may face a few short-term headwinds, but the long-term fundamentals remain quite supportive. We continue to believe that the prospects of lower market and policy rates this year, a much-improved earnings outlook through 2025, and the tailwinds of several secular themes should support better US equity market valuations in 2024. We believe USD will be supported during a Fed easing cycle, amid a slowing global economy.

What Happened?

As expected, the Fed left rates unchanged at 5.25-5.5% for a fourth straight meeting. We still believe that the FOMC will begin to cut policy rates in the second quarter of this year, starting June, and will do so three times, lowering the Fed funds rate by 0.75% before year end. Next year, our outlook is for another 0.75% of policy rate cuts, leaving the Fed funds rate in the 3.75-4% range by year-end 2025. 

The FOMC removed a line from their statement that referenced "additional policy firming" but included a new sentence saying it won't be appropriate to cut rates until the committee has "gained greater confidence that inflation is moving sustainably toward 2%.“ It’s important to note that the US Core PCE has slowed to a 1.5% annualised rate over the last three months and 1.9% annualised over the last six months.

The press statement from the FOMC reined in expectations for a March rate cut. Powell further explained in the press conference that he thinks a cut at the next meeting is unlikely, as Fed officials really want to see a continuation of the good inflation data they've seen lately. He did say that good news on that front could move up the time frame, keeping the door to a March cut slightly ajar. Powell sounded a cautious tone on the pace of rate cuts. He noted that the decision to start cutting rates would be highly consequential and pointed to past surprising turns in economic data.

Policymakers signalled they’re not yet ready to cut interest rates as soon as the next meeting in March, saying that a move likely won’t be appropriate until they gain more confidence that "inflation is moving sustainably toward 2%.“ No proposal to cut rates at this meeting, but the Fed did signal that they would look at all options going forward. The FOMC Chair said policymakers began discussing when to start slowing the pace of their balance sheet runoff, or quantitative tightening, at this meeting but plan to have a more robust conversation about it in March.

In the wake of fourth-quarter GDP rising more than forecast, the Fed characterised economic growth as "solid" and said job gains "remain strong". In terms of inflation, the Fed stated that inflation has eased over the past year but remained elevated (still above the 2% symmetric target).

The Fed omitted language that had been included in statement in some form since March 2023, calling the banking system "sound and resilient," and warning that tighter credit conditions were likely to weigh on the economy.

Powell reiterated that they want to see more data. In the base case, the economy is performing well, and the labour market remains strong. If they see a weakening in the labour market, that would affect their decision to cut rates sooner, he added.

The Fed Chairman also noted that the disparity in views on the FOMC is clear from public remarks made by numerous policymakers. "There’s a wide disparity, a healthy disparity of views," Powell says of the committee.

Markets reacted to the meeting by further reducing the chances of a March rate cut, which supported the USD but weighed somewhat on equities overnight. The impact on bond markets was muted thanks to the quarterly refunding announcement by the US Treasury, which said it does not see the need to increase bond auction sizes, thereby reducing supply concerns.

Source: Bloomberg, HSBC Global Private Banking and Wealth as at 31 January 2024.

Investment implications

The Fed has been on hold since July and made it fairly clear that it’s done tightening, unless inflation reignites. This seems unlikely as the US economy is slowing and disinflation continues. The FOMC yet again made its intentions clear by announcing it’s beginning to discuss lowering policy rates. Given the progress the Fed has seen in core inflation and the continued disinflation still underway, it should provide ample room to ease.

For fixed income investors, we remain bullish on Treasuries and maintain medium-to-long duration. In the credit markets, we continue to like investment grade with a focus on quality. For equity investors, the recent rally may face a few short-term headwinds, but the long-term fundamentals remain quite supportive. We continue to believe that the prospects of lower market and policy rates this year, a much-improved earnings outlook through 2025, and the tailwinds of several secular themes should provide the impetus for better US equity market valuations in 2024. 

Financial markets are expecting interest rate cuts in 2024, with investors pricing in the probability that rates should be lower than their current level. Historically, lower market and policy rates have been accretive to earnings. As a result, that development should be bullish for stocks, especially considering that rate hikes weighed the S&P 500 down heavily in 2022. In the US, a pause from the Fed, combined with continued disinflation and an improving earnings outlook, could be a real positive boost to equity fundamentals.

As regards to the US dollar, we believe USD will be supported during a Fed easing cycle, amid a slowing global economy. Recession risks still loom, while other central banks may also be easing, and where the safe-haven USD will continue to offer a relatively high yield.

Related Insights

As market expectations of a March Fed rate cut are too premature, we believe it will need...[1 Feb]

  • As expected, the FOMC voted to keep the Federal funds target range at 5.25-5.5% at its...[15 Dec]

The financial markets have experienced another eventful year, from the collapse of Silicon...[29 Nov]

The FOMC again unanimously voted to keep the federal funds target range at 5.25-5.5% after…[2 Nov]

Disclaimer

This document or video is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document or video is distributed and/or made available by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (“HIFC”), HSBC Private Investment Counsel (Canada) Inc. (“HPIC”) and HSBC InvestDirect division of HSBC Securities (Canada) Inc. (“HIDC”)), HSBC Bank (China) Company Limited, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (198401015221  (127776-V))/HSBC Amanah Malaysia Berhad (20080100642 1 (807705-X)), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, Greece, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID), HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay), HBAP Sri Lanka Branch, The Hongkong and Shanghai Banking Corporation Limited – Philippine Branch, HSBC Investment and Insurance Brokerage, Philippines Inc, and HSBC FinTech Services (Shanghai) Company Limited and HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group (collectively, the “Distributors”) to their respective clients. This document or video is for general circulation and information purposes only.

 

The contents of this document or video may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document or video must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document or video will be the responsibility of the user and may lead to legal proceedings. The material contained in this document or video is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document or video may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document or video has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.

 

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document or video is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments are subject to market risks, read all investment related documents carefully.

 

This document or video provides a high level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the Distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult an independent financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.

 

The accuracy and/or completeness of any third-party information obtained from sources which we believe to be reliable might have not been independently verified, hence Customer must seek from several sources prior to making investment decision. 

 

Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)

 

HSBC Asset Management is a group of companies, including AMCA, that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.

 

Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)

 

HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Mutual Funds and/or the HSBC Pooled Funds through the HSBC World Selection® Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.

 

®World Selection is a registered trademark of HSBC Group Management Services Limited.

 

Important Information about HSBC Private Investment Counsel (Canada) Inc. (“HPIC”)

 

HPIC is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Counsel service is a discretionary portfolio management service offered by HPIC. Under this discretionary service, assets of participating clients will be invested by HPIC or its delegated portfolio manager, AMCA, in securities, including but not limited to, stocks, bonds, mutual funds, pooled funds and derivatives. The value of an investment in or purchased as part of the Private Investment Counsel service may change frequently and past performance may not be repeated.

 

Important Information about HSBC InvestDirect (“HIDC”)

 

HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.

 

The following statement is only applicable to HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group with regard to how the publication is distributed to its customers: This publication is distributed by Wealth Insights of HSBC México, and its objective is for informational purposes only and should not be interpreted as an offer or invitation to buy or sell any security related to financial instruments, investments or other financial product. This communication is not intended to contain an exhaustive description of the considerations that may be important in making a decision to make any change and/or modification to any product, and what is contained or reflected in this report does not constitute, and is not intended to constitute, nor should it be construed as advice, investment advice or a recommendation, offer or solicitation to buy or sell any service, product, security, merchandise, currency or any other asset.

 

Receiving parties should not consider this document as a substitute for their own judgment. The past performance of the securities or financial instruments mentioned herein is not necessarily indicative of future results. All information, as well as prices indicated, are subject to change without prior notice; Wealth Insights of HSBC Mexico is not obliged to update or keep it current or to give any notification in the event that the information presented here undergoes any update or change. The securities and investment products described herein may not be suitable for sale in all jurisdictions or may not be suitable for some categories of investors.

 

The information contained in this communication is derived from a variety of sources deemed reliable; however, its accuracy or completeness cannot be guaranteed. HSBC México will not be responsible for any loss or damage of any kind that may arise from transmission errors, inaccuracies, omissions, changes in market factors or conditions, or any other circumstance beyond the control of HSBC. Different HSBC legal entities may carry out Wealth Insights internationally in accordance with local regulatory requirements. HSBC specifically prohibits the redistribution of this material and is not responsible for any actions that third parties may take to and/or with it.

 

Important Information about the Hongkong and Shanghai Banking Corporation Limited, India (“HSBC India”)

 

HSBC India is a branch of The Hongkong and Shanghai Banking Corporation Limited. HSBC India is a distributor of mutual funds and referrer of investment products from third party entities registered and regulated in India. HSBC India does not distribute investment products to those persons who are either the citizens or residents of United States of America (USA), Canada, Australia or New Zealand or any other jurisdiction where such distribution would be contrary to law or regulation.

 

The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/ business. However, the Bank disclaims any guarantee on the management or operation performance of the trust business.

 

The following statement is only applicable to PT Bank HSBC Indonesia (“HBID”): PT Bank HSBC Indonesia (“HBID”) is licensed and supervised by Indonesia Financial Services Authority (“OJK”). Customer must understand that historical performance does not guarantee future performance. Investment product that are offered in HBID is third party products, HBID is a selling agent for third party product such as Mutual Fund and Bonds. HBID and HSBC Group (HSBC Holdings Plc and its subsidiaries and associates company or any of its branches) does not guarantee the underlying investment, principal or return on customer investment. Investment in Mutual Funds and Bonds is not covered by the deposit insurance program of the Indonesian Deposit Insurance Corporation (LPS).

 

THE CONTENTS OF THIS DOCUMENT OR VIDEO HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION.

 

YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT OR VIDEO. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT OR VIDEO, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

 

© Copyright 2024. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.

 

No part of this document or video may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.

 

Important information on sustainable investing

 

In broad terms “ESG and sustainable investing” products include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors to varying degrees. Certain instruments we classify as sustainable may be in the process of changing to deliver sustainability outcomes. There is no guarantee that ESG and Sustainable investing products will produce returns similar to those which don’t consider these factors. ESG and Sustainable investing products may diverge from traditional market benchmarks. In addition, there is no standard definition of, or measurement criteria for, ESG and Sustainable investing or the impact of ESG and Sustainable investing products. ESG and Sustainable investing and related impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.

 

HSBC may rely on measurement criteria devised and reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the ESG / sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of ESG / sustainability impact will be achieved. ESG and Sustainable investing is an evolving area and new regulations are being developed which will affect how investments can be categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.