After the US Federal Open Market Committee (FOMC) voted unanimously to keep interest rates unchanged, investment managers discuss the impact.

The S&P 500 closed at a new high for the year and the yield on 10-year US Treasuries dropped sharply to close to 4 per cent yesterday after the Federal Reserve laid the groundwork for rate cuts in 2024.

The Federal Open Market Committee (FOMC) voted unanimously to keep rates unchanged in a 5.25 per cent to 5.5 per cent target range and to continue to significantly reduce its securities holdings. This decision was widely expected and marked the third consecutive time the Fed paused since starting its 525 bps hike cycle in March 2022.

The Fed’s new economic projections pointed to a median of 75 bps of rate cuts next year, more than the 50 bps anticipated going into the meeting. The more dovish tone and comments from Fed Chair Jay Powell supported the view that the hiking cycle is "at or near peak" since it is "not likely" that the committee will hike rates again.

By the US equity market close, the S&P 500 had gained 1.4 per cent to 4,707 and the US 10-year Treasury yield fell 17 bps to 4.02 per cent.

Here are some reactions from wealth managers to the decision.

Mark Haefele, CIO, UBS Global Wealth Management
“US bonds and equities rallied in tandem after the Fed signaled the end of the rate hiking cycle and pointed to a faster-than-expected pace of rate cuts in 2024. Overall, we continue to recommend seeking quality in both bond and equities. Bonds remain our preferred asset class and the Fed’s actions support our view that the bond market has further to rally in 2024. We forecast 10-year US Treasury yields to end 2024 at 3.5 per cent. We remain most preferred on high-quality bonds – specifically high grade (government) and investment grade, particularly in the five-year segment.”

“Within equities, we continue to recommend a bias toward quality – companies with strong returns on invested capital, resilient operating margins, and relatively low debt on their balance sheets.”

Daniele Antonucci, CIO at Quintet Private Bank (parent of Brown Shipley)
“The decision to keep the key Fed policy rate at current levels isn’t the interesting bit. That was unanimously expected. The key point is that the central bank is now hinting at greater scope for rate cuts next year and is using a softer language on inflation. After all, while the battle on inflation isn’t fully won, the deceleration is noticeable and we think likely to continue.

“The US economy has been growing strongly in the third quarter of this year, but this is now changing with high interest rates feeding through.The labor market is still solid, but signs of more moderate job creation are emerging. With supply chains also working better, inflation has fallen over the past year. Even though it’s unlikely that the Fed will fully reach its 2 per cent inflation target next year, this policy decision confirms that the central bank is at peak rates.

“To keep downward pressure on inflation, we believe it will keep rates elevated over the coming months before cutting from mid-2024 to support growth. This removes the major headwind for equity markets we’ve seen since 2022. As a result, we’ve slightly moderated our preference for bonds over equities. Of course, we cannot ignore some risks of a deeper recession materializing alongside a more fragmented world and ongoing geopolitical risks. Given these lingering concerns, we think high-quality bonds remain attractive due to compelling valuations and an ability to protect against recessionary risks.”

Lombard Odier, senior macro strategist, Bill Papadakis 
“Fed Chair Jerome Powell went beyond simply acknowledging the progress achieved so far in his remarks, as he also sounded optimistic about the path forward. Most importantly, he did not attempt to push back against current market expectations for substantial rate cuts next year. We see that as a powerful signal that the Fed will be ready to switch to rate cuts sooner than we previously expected. Along with the encouraging data out of this week’s Consumer Price Index and Producer Price Index releases, these developments have made us revise our expectations for the Fed’s policy path in 2024. We now expect four 25 basis point rate cuts, up from two previously.”

Christian Scherrmann, US economist at DWS
“Overall, the meeting was a bit more dovish than we expected. It seems that central bankers are comfortable with what they are seeing on the inflation front. However, we would like to remind that they are not yet on autopilot to the runway and that the timing of the first rate cuts still depends on the evolution of the incoming data and, in particular, of inflation. There are risks that we could see some disappointment on this looking ahead. After all, the Fed told us at the last meeting in 2023 that rates are probably high enough, but not how long they need to stay there. The "longer" in "higher for longer" will now be the subject of a broader discussion in the coming months.”

Paul McSheaffrey, senior banking partner, Hong Kong, KPMG China
“No raise in the Fed rates at this meeting perhaps indicates that we may have reached the top of the interest rate cycle. However, I don't think this should be taken as a sign that rates will fall in the short term – the US Fed will want to ensure they really have got inflation under control before reducing rates.”