Investment Strategies

US Fed, UK Keep Rates Steady; Switzerland Cuts – Wealth Managers' Reactions

Editorial Staff March 22, 2024

US Fed, UK Keep Rates Steady; Switzerland Cuts – Wealth Managers' Reactions

Central banks delivered a variety of policy responses this week: two kept rates steady, one cut them, and another hiked rates for the first time in 17 years, reflecting the different macroeconomic conditions. This gives wealth management asset allocators much to ponder.

It has been a busy week for central banks. The Bank of Japan raised rates for the first time in 17 years; the US Federal Reserve (pictured) is still pausing on monetary tightening, and the Bank of England left rates unchanged yesterday. And although this didn't prompt much market reaction or commentary to this publication, the Swiss National Bank cut interest rates – unexpectedly – by 25 basis points, to 1.5 per cent. 

The Fed extended pausing its monetary tightening campaign for a fifth meeting in a row and it kept to its projection for three 25 basis point cuts in 2024. However, the Fed revised its projections for cuts in 2025, with 75 basis points of cuts penciled in, instead of 100 basis points in its previous quarterly projections.

As for the BoE, it voted eight to one to keep rates unchanged at 5.25 per cent, as expected. 

Here is a range of responses to the Fed’s actions (reactions to the BoE and SNB are further below):

Neeraj Seth, chief investment officer, APAC fixed income, and Navin Saigal, head of Asia macro for fundamental fixed income, BlackRock
The Fed’s decision to be patient, while not unexpected, likely also delays the start of any broader easing cycle in Asia. The question that remains for Asian central banks in economies with stronger disinflationary trends, many of which are less exposed to services consumption than the US, and hence less impacted by services inflation stickiness, is whether it would be prudent to ease policy ahead of the Fed? Divergent inflation paths would support that notion, but on the flipside the lower starting level of yields and likely weakening impact on local currencies of an earlier easing cycle could warrant a similarly patient stance. 

Either way, the correlation between US and Asian bonds remains weak, making Asian bonds an intriguing diversifier, a dynamic we think that is unlikely to change as long as economic cycles between the two regions remain desynchronized.

Neil Birrell, chief investment officer at Premier Miton Investors and lead fund manager of the Premier Miton Diversified Funds
There were no surprises in the Fed’s decision and three rate cuts remain off the table for 2024. They clearly remain wary of inflation risk and have dialed back expectations for rate cuts next year. While the US economy remains robust and inflation is a concern, we are not likely to see the Fed talk in anything but a conservative manner. They want that soft landing and are playing the game to achieve it.

Joost van Leenders, senior investment strategist at Van Lanschot Kempen, the Dutch wealth manager
The main question going forward is if we will get the cuts the Fed foresees with such growth and inflation projections. A main argument for rate cuts is that monetary policy should be restrictive. At its current 5.25 to 5.5 per cent range, the Fed funds rate is significantly above any estimate of the neutral rate, which is seen at 3 per cent at the highest.

And the real Fed funds rate, where inflation is subtracted from the nominal rate, has risen with the decline in inflation. Anyway, the economy seems to be coping quite well with the current Fed funds rate. This could be due to some tailwinds like excess savings built up during the pandemic being spent and the fiscal stimulus, but these tailwinds are fading. Looking ahead we have some doubts whether the Fed’s growth and interest rate projections are compatible. We would think growth should slow a bit more than the Fed foresees to get the three projected rate cuts. Or, if the Fed’s growth projection is right, we think the Fed may cut less than three times.

Whitney Watson, co-head and co-chief investment officer of fixed income and liquidity solutions for Goldman Sachs Asset Management
Despite projections of stronger growth, lower unemployment, and slightly higher core PCE [personal consumption expenditure] inflation, policymakers still anticipate three rate cuts this year. We continue to expect that inflation progress over the past year and disinflationary signals, such as rebalancing in labor, goods, and rental markets, will lead the Fed to begin its cutting cycle this summer. The slight rise in the longer-run policy rate forecast is both negligible and noteworthy. It is negligible because market expectations are already much higher, but noteworthy as it reinforces the market's recent perception that the rate-cutting cycle may be shallower than initially anticipated. Overall, despite recent bumps in the inflation road, major central banks remain on track for rate cuts in the coming months and high-quality fixed income bonds stand to benefit.

Bank of England
Daniele Antonucci, CIO at Quintet Private Bank
The key thing is that policymakers took extra crucial steps to set the stage for forthcoming cuts. This is because the Bank is becoming increasingly confident that inflation is on a more convincing downtrend. So central bankers are now looking to reduce the degree of monetary tightening and, likely, cut it June.

Like the Fed and the European Central Bank, the Bank of England is basically validating market expectations of rate cuts by mid-year. In the UK, we continue to look for five quarter-point cuts in 2024.

Julian Jessop, economics fellow at the free market think tank, the Institute of Economic Affairs
The Monetary Policy Committee’s decision to leave interest rates on hold was disappointing but unsurprising. However, there were some welcome hints that cuts are coming soon.

For a start, the two members who had still been voting for another hike both switched to no change. The debate is now about when rates will be cut, not if. The accompanying statement also suggested that the MPC is becoming more confident that underlying inflation pressures are fading. 

The big picture is still that monetary policy is too tight and the Bank has been too slow to cut rates. Nonetheless, the shift in tone today [yesterday] is important.

Andrew Jones, portfolio manager at Janus Henderson Investors
As it seems very likely that inflation will continue to move downwards over the next few months, we would still expect to see interest rate cuts in the middle of the year. UK domestic stocks are currently valued very modestly in relation to their history, but as recent trading news from companies such as Wickes, DFS, Marshalls and Travis Perkins has shown, demand is currently weak. It is likely though when interest rates are cut that stocks which are mostly exposed to the UK economy could well start to attract more interest again.

Swiss National Bank
Capital Economics

The SNB under chairman Thomas Jordan has never shied away from making big calls, so it was fitting that it surprised markets with a 25 bp rate cut today, to 1.5 per cent, only three weeks after Mr Jordan announced he would leave his post in September. We expect two more rate cuts this year, leaving the policy rate at 1.0 per cent. In contrast, Norges Bank left its policy rate on hold today and appeared in no rush to start cutting rates, but we still think it will ease policy sooner than it is signaling.

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