The Fed cut rates again in October, but recent Fed speakers have cast doubt on further 2025 cuts.
- The Fed cut policy rates by a further 25bps in October, building on the 25 basis points reduction in September, its first reduction since 2024.
- But short-term interest rate futures price a 47% chance of a December cut, as numerous Fed speakers expressed doubt about the health of the labor market and the extent of US inflation easing.
A softening labor market gives the Fed scope to continue easing.
- We believe concerns about a weakening labor market are likely to be the primary driver of the Fed’s decision-making, given limited signs of tariff costs passing through.
- We expect US rates to fall by a further 50 basis points by the end of the first quarter of 2026.
With policy rates set to fall further, investors should put cash to work now.
- We recommend that investors phase excess liquidity into diversified portfolios.
- To achieve alternative sources of portfolio income to cash, we see medium-duration quality bonds and equity income strategies as appealing.
- We also expect lower interest rates, robust corporate earnings, and AI tailwinds to support further gains for equity markets over the coming year.
New this week
Comments on 13 November suggested a number of Fed policymakers are increasingly hesitant about a December rate cut, with market odds dropping to 52%. San Francisco Fed President Daly called a decision “premature,” while Minneapolis Fed President Kashkari said, “We have inflation that's still too high, running at about 3%.” Boston Fed President Collins stated, “Absent evidence of a notable labor market deterioration, I would be hesitant to ease policy further,” based on Reuters reporting.
Did you know?
- Soft landing rate cuts have historically been positive for stocks, and the Fed’s shift from restrictive to more neutral policy should help extend the bull market.
- In a downside scenario, if labor market weakness proves to be more severe or durable, we believe the Fed could cut rates by 200-300bps by mid-2026.
- Cash tends to underperform other assets over time: Stocks have outperformed cash in 86% of all 10-year periods and 100% of all 20-year periods since 1926, with cumulative returns more than 200 times higher than cash over the long term.
Investment view
We believe the resumption of the Fed's rate-cutting cycle increases the imperative for investors to put cash to work. We recommend phasing excess liquidity into diversified portfolios. We also continue to like quality bonds, which can offer a more durable source of income. Investors underallocated to equities should consider adding to stocks in CIO's preferred areas, including AI, Power and resources, and Longevity.
