WeeklyWatch – September shifts: US interest rate cuts likely
28th August 2024
Stock Take
Has the time come for the US?
Last week, Federal Reserve Chairman Jerome Powell spoke at the Jackson Hole economic symposium. At long last, he suggested that the time had arrived for the Fed to begin its cutting of interest rates.
Although held annually, this year’s event was met with much more intrigue from economists as there was a noticeable shift in the narrative. It’s no longer a question of if but rather when interest rates will be cut.
Since the start of August, this burning question has been at the forefront of investors’ and economists’ minds. This became even more pertinent when the weakened job data sent markets into a temporary frenzy and gave rise to concerns about a recession happening. For the most part, global markets have largely recovered.
Steering the new course in September
Powell’s direction seemed pretty decisive: “The time has come for policy to adjust.”
But with new direction comes a new set of questions, and economists are keen to know the trajectory of this new adjustment. Regarding this, Powell stated:
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
September is decision month. The Fed will meet to make their decision on the first interest rate cut; it’s expected that there will be either a 0.25% or a 0.50% cut. But before this takes place, the US will reveal their latest data regarding jobs, which is highly likely to shape the Fed’s overall decision. If the data shows a healthier market, the Fed could refrain from cutting rates too quickly, but weaker data could lead to a more rapid cut in an effort to boost economic growth.
But what do the economists think?
Senior US Economist at Schroders George Brown thinks that a 0.50% interest rate cut would be unwise. He states:
“It would muddy the messaging on the subsequent pace of easing at best, and at worst, it would fuel fears of a recession. From our perspective, the US economy is slowing but remains solid.”
Powell’s words were met with a reasonably quiet response from the markets, suggesting that US interest rate cuts have been widely anticipated and already priced in. And he wasn’t the only central banker to make his views known last week. Bank of England (BoE) Governor Andrew Bailey erred on the side of caution and implied that it was too soon to claim victory over inflation. He added:
“Second round inflation effects appear to be smaller than we expected.… We are now seeing a revision down in our assessment of that intrinsic persistence, but this is not something we can take for granted.”
The combination of these viewpoints indicates that the BoE will likely feel comfortable enough to make more cuts to the UK Bank Rate, but it will be done at a gradual and measured pace.
The UK takes it all in
Questions surrounding British interest rates were eased slightly for Bailey this morning. Data from the British Retail Consortium (BRC) showed that in August, shop prices fell at an annual rate of 0.30%. The BRC Chief Executive, Helen Dickinson, suggested discounts to shift the summer stock with a particular focus on fashion and household goods. These ended up being key drivers of the fall.
This was quite momentous as it marked the first time since prices had fallen in nearly three years and also serves as a strong indicator of the direction of inflation ahead of the next official Office for National Statistics release in mid-September.
Giving rise to other goods
However, it was not all good news for our wallets… It’s been revealed that from October, the UK will raise their fuel price cap by 10%. This is highly likely to increase the pressure on headline inflation rates and put a pinch on our spending.
Trouble across the Middle East impacts global markets
Increasing geopolitical tensions across the Middle East are creating more oil price pressures and impacting global markets. In the previous week, there were more missile exchanges between Israel and Hezbollah in Lebanon, giving rise to more uncertainty.
Japan recuperating
The Japanese Nikkei Index continued to make progress after its dramatic drop at the start of the month. The widespread feeling was one of lessons having been learnt.
The Bank of Japan Governor, Kazuo Ueda, addressed Parliament last week, saying:
“Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being.”
Schroders is a fund manager for St. James’s Place.
Wealth Check
Saving, investing – they’re the same thing, right?
Saving and investing – we usually think of these terms as the main ways to put money aside for the future. It’s also easy to confuse the two terms, thinking of them as the same thing or that you should choose one or the other.
The truth is that they’re two very different options. They both serve as separate ways for you to grow your money to prepare for the future.
Saving yourself from a financial headache
In general terms, saving involves putting money aside in the short term. This could be for a ‘just-in-case’ rainy day fund which can be used to cover urgent financial needs such as unexpected car repairs, boiler breakdowns, holidays or a new kitchen. Whatever you want to use the money for, it’s wise to have a chunk of money in a cash account that is without restrictions on withdrawals that you can access at short notice.
A vital part of your financial resilience is instant or easy access cash savings. Financial advisers advise that you keep three to six months of your salary as ‘emergency’ money to withdraw at any point.
If you’re regularly paying in and haven’t checked the amounts in your savings and current accounts, it would be wise to do so. Having too much money sitting in a cash account usually misses out on a lot of financial potential – it could be working much harder for you.
Invest for the best
When long-term goals are factored into your financial equation, that’s where investments are key. Investing in stocks, shares or bonds – which makes your money untouchable for ten to fifteen years, or maybe even more – gives you the opportunity to increase your money much more than you would in a cash account.
Investing to ensure a comfortable retirement is a prime example of this. We can’t put a definitive financial figure on what will constitute a comfortable retirement in the future, mostly because we don’t know how long we’ll live for. But planning to retire is still essential, and investing for that day requires a long-term financial strategy.
But with investment comes risk. Markets rise and fall all the time, and this has an impact on the value of your investments. However, markets are resilient, and they typically level out medium long-term (around five years or more). Plus, the greater growth potential means that your money can reap the benefits of a ‘snowballing’ effect of compounding.
The value of an investment with Wellesley will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested.
An investment in equities will not provide the security of capital associated with a deposit account with a bank or building society.
The Last Word
“The guns have fallen silent. The stars have aligned. The great wait is over. Come see. It will not be televised.”
– Oasis, an English rock band, confirming their rumoured reunion tour fifteen years after their last show.
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SJP approved 27/08/2024