The Fed resumed its rate-cutting cycle in September.
- The Fed cut policy rates by a further 25 basis points in October, building on the 25bps reduction in September, which was the first cut since 2024.
- In recent weeks, some Fed officials have expressed doubts about whether a further rate cut this year is warranted, while others have said they believe a near-term reduction is appropriate.
- At the time of writing, short-term interest rate futures price around a 95% chance of a December cut.
We believe concerns about a weaker labor market give the Fed scope to continue easing.
- Concerns about a weaker labor market are likely to be the primary driver of the Fed’s decision-making, in our view, given limited signs of tariff costs passing through.
- New York Fed President John Williams said he currently regards monetary policy as “moderately restrictive,” and still sees room to cut rates “in the near term.”
- We expect US policy 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
At the time of writing, futures markets are pricing around a 95% chance of a rate cut at the FOMC's December meeting, which concludes on Wednesday. Investors will also focus on Chair Jerome Powell's press conference and on Fed officials' latest summary of economy projections.
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 the US economy slows sharply, we believe the Fed could cut rates by 200-300bps in 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 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.
