This is a massive pivot from the FED! A full 180! Only two weeks ago, they said they couldn’t see interest rates falling, and now they foresee lowering rates by 75 basis points next year. Why the turnaround?
US Jobs are being increased at a faster pace than expected. The implications are that the FED will lower interest rates but potentially at a slower pace. Lower interest rates mean companies can potentially produce higher profits, and consumers have more money to spend, stimulating the economy.
The FED left interest rates unchanged on Wednesday and, with the edition of the rate cut prediction, had Wall Street abuzz.
The Dow Jones achieved its first record close in over two years. Fifteen months ago, the Dow slid into bear territory with Jerome Powell’s attack on inflation. The Dow Jones Industrial Average, consists of stocks linked to the economy’s health and are affected by high interest rates. They are now starting to recover after the FED’s news.
deVere CEO Nigel Green comments. “The increased chatter that the Federal Reserve could cut interest rates, perhaps multiple times, next year has provided ballast to domestic risk assets. But advisors and investors shouldn’t take their eye off the possibility of rate cuts outside the U.S. In fact, some market observers believe the European Central Bank, aided by declining inflation in the eurozone, could be compelled to reduce borrowing costs as soon as the first quarter of 2024. Europe seems to have more space to reduce rates. Potential winning sectors include the banks. I also believe energy companies are well placed in this current environment. The biggest winners this year are AI-linked Tech companies. “
“A rate cut by the ECB could be expected to inject liquidity into financial markets, leading to a surge in equity prices. International investors could find opportunities for capital appreciation, especially in sectors that are sensitive to interest rates, such as real estate and utilities.”
The market sentiment around rate cuts has made the markets over-eager.
It is still vital that investors diversify across asset classes to spread risk and capture opportunities arising from different market conditions and possibly consider alternative investments that may provide returns less correlated with traditional asset classes.