Between one December and another, a lot has changed for the Federal Reserve. The Fed ended 2023 with a bang and the promise of 10 rate cuts to kick in between 2024 and 2026. That number is now down to 8. In December 2023, the Fed Funds rate was between 5.25% and 5.50%. The Fed expected to deliver 3 rate cuts in 2024 bringing the Fed Funds rate to 4.50% to 4.75%. In 2024, the US Central Bank has actually delivered more than promised by bringing rates down to 4.25%-4.50%. But, the Fed is now worried about how sticky inflation could be and is moderating the pace of rate cuts over the next two years.
If we look beyond this year, last year’s projections promised 4 rate cuts in 2025 whereas this year’s forecast leaves room only for 2 rate cuts. Central Banks worldwide will find it hard to diverge from the Fed’s policy path and may be forced to slow down policy easing. The ramifications of fewer rate cuts will touch emerging markets and may trigger outflows. Interest rates moving down in 2025 are likely to be more backloaded than frontloaded.
The Fed’s messaging is clear: taming inflation in a short timeline is no easy task. This makes bonds a less attractive proposition in today’s context. So, investors will naturally tend to rely more on equities to create wealth and beat inflation. While equities may be up to the task, investors must be more cautious, wise, and value-conscious in their choices.