Prof. Dr Jan Viebig, Chief Investment Officer of ODDO BHF SE, comments on the Federal Reserve’s interest rate decision:
‘On Wednesday evening, the US Federal Reserve lowered the target range for the federal funds rate by half a percentage point to 4.75 to 5.00 per cent. This puts the interest rate cut at the upper end of expectations. Given the Fed’s traditional policy of small interest rate moves, this was an unusually large move.
What matters is not so much the size of this first interest rate cut, but the fact that the Fed has made a start at all. With this decision, the US central bank has kicked off the interest rate cut cycle. It is highly likely that we will see a series of further interest rate cuts in 2024 and 2025.
It would be wrong to conclude from the size of the rate cut that the overall economic situation would have required a drastic move in the Fed’s view.
The assessment of economic growth confirms that economic momentum will slow down. However, the Fed sees no concrete risk of the US economy slipping into recession. At 2.0 per cent for each of the years 2024 to 2026, the Fed’s growth forecast for the US economy is virtually unchanged from June. The Fed’s upward revision of the expected unemployment rate confirms the obvious: that the labour market has lost momentum and that the unemployment rate is unlikely to fall from the still low level of 4.2 per cent. While there was a slight downward revision to the inflation forecast, the Fed’s expectation is that inflation will still be slightly below its target by the end of 2025.
The Fed shows no signs of recession fears, nor does it lapse into alarmism. However, the expectations of the Federal Open Market Committee are well below the aggressive expectations of the markets. While the markets expect key rates to fall to around the neutral level – below 3 per cent – by the end of 2025, the central bankers’ estimate is about 0.5 percentage points higher. Given what I consider to be exaggerated expectations in the bond markets, it is not surprising that the initial reaction there is negative. In contrast, equity markets reacted positively to this monetary stimulus in the immediate aftermath of the rate decision.’
