The Fed is likely to hold rates steady in the near term.
- The Federal Reserve left interest rates unchanged at 3.50-3.75% last week, with Chair Jerome Powell stressing that officials would need to see more progress in moderating inflation in the US to ease further.
- The US central bank also raised its inflation and GDP growth projections for 2026.
- Powell added that it was too soon to know the scope and duration of the Iran war's potential effects on the economy.
But we think the Fed’s policy easing bias remains intact.
- We expect slowing core goods inflation in the US in the coming months to help clear the path for the next cut.
- Current inflation is lower than it was when the Russia-Ukraine war triggered spikes in energy prices, and AI advancement with fast adoption poses a structural risk to the labor market.
- A large majority of policymakers continue to favor returning the policy rate closer to 3%.
Lower interest rates strengthen the case for investors to put excess 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.
New this week
The median dot in the Fed's latest assessment of the rate path continues to imply two rate cuts over the next two years.
Did you know?
- Analysis by the Dallas Fed shows that the incremental price pressure due to rises in energy prices tends to fade quickly after a few months, with core inflation little changed.
- Former Fed Governor Warsh's comments suggest a preference for a lower rate policy. He has said he favors looking beyond tariff inflation and thinks current productivity trends will be disinflationary. These comments are consistent with our view that the easing cycle is intact.
- 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. Investors can consider phasing excess liquidity into diversified portfolios. We also like quality bonds, which can offer a more durable source of income.
