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Changechevron_rightThe views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
As the Federal Reserve (Fed) recalibrates rates to balance price stability and economic growth over time, markets naturally react. While investors have been eager for the arrival of rate cuts to juice their portfolio returns, the context of the cuts matters. The economic backdrop sets the stage for what plays out in the markets from the Fed’s opening act and performance is not guaranteed.
Most often, cuts are initiated when growth has stalled. However, on the dawn of a new easing era, economic growth appears solid — the victory over inflation is the catalyst for rate cuts. Current worries about increasing recession risk are valid, but with GDP growing at 3% in the US, and with Q3 GDP tracking strong, we believe immediate concerns are overblown.
As a result, history can offer examples of rate cuts facilitating a soft landing. Such periods, such as 1995, were characterized by “mid-cycle adjustments” to policy rates, not weak growth and “late-cycle panic.” Should history rhyme, conviction of a soft-landing achievement should encourage believers to be cautious about big cycle bets or being too defensive; many more cuts are priced than is usual in a mid-cycle adjustment — driven by the rapid disinflation.
Experts
What is “the economic cycle,” anyway?
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Can central bank independence survive?
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Time to capitalise on the evolving role of bonds?
Continue readingWalking a mile in Fed Chair Powell’s shoes
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Massive market sell-off: Justified or an overreaction?
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What is “the economic cycle,” anyway?
See why the relationship between asset prices and the economic cycle is more complex than you might think, why a US recession is unlikely, and what a more dovish Fed could mean for the US and global markets.
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The real issue on rate cuts? Keep your eyes on the dot (plot)
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Brij Khurana