The Fed is likely to hold rates steady until June.
- The Fed held rates steady in January after three consecutive reductions last year, and the likelihood of a March cut has diminished.
- The US central bank upgraded its growth assessment and highlighted signs of stabilization in the labor market, both of which reduce the urgency for near-term easing.
- Many FOMC participants remain uncomfortable looking through tariff-related inflation pressures in the near term, making it difficult to form a consensus on further rate cuts.
But we believe the Fed has scope to ease by another 50 basis points this year.
- The Fed's guidance signals a strong inclination to continue lowering rates toward 3%.
- By mid-2026, the path for rate cuts should become easier as 2H growth slows and goods inflation eases. We now expect the next rate cut in June, followed by a second in September, bringing the policy rate range to 3.00-3.25%.
- The nomination of Kevin Warsh as the next Fed chair does not alter the Fed outlook in the near term, in our view.
Lower interest rates strengthen the case for investors to put cash to work.
- Investors should consider phasing 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
US President Donald Trump nominated former Fed governor Kevin Warsh to succeed Jerome Powell as the next Chair of the Federal Reserve Board when Powell’s term as chair ends in May. The timing of the upcoming confirmation is uncertain because Senator Thom Tillis has pledged to block all Fed nominees until ongoing legal matters involving Chair Powell are resolved.
Did you know?
- Former Governor Warsh's recent comments suggest a preference for lower rate policy. He has said he favors looking through tariff inflation and thinks current productivity trends will be disinflationary. These dissents and comments are consistent with our view that the normalization cycle is intact, even if it now includes a longer pause.
- Moreover, the seven permanent FOMC board voters, both current and prospective, tend to be moderately more dovish than the median forecast and generally view neutral as closer to 3% or below.
- 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.
Investment view
Lower interest rates reduce potential returns on cash. We therefore recommend that investors consider phasing excess liquidity into diversified portfolios. We also 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.
