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The Fed’s rate decision: Not so surprising, but what’s the path forward? 

19 September 2024

Alex Grassino, Global Head of Macroeconomic Strategy

The US Federal Reserve (Fed) kicked off its long-awaited monetary easing cycle with a bang on 18 September (US time), electing to reduce its policy rate by 50 basis points (bps). While the size of the rate cut wasn’t officially factored into many Fed forecasters’ base-case scenarios, it wasn’t a real ‘surprise’ decision either. In this Market Note, Alex Grassino, Global Head of Macroeconomic Strategy, provides his latest analysis on the Fed meeting.

 

Key takeaways:

Our rate forecast

If the US economy cools—and we maintain that it probably will—there may be future points at which some of the economic data surprises to the downside, potentially triggering a more aggressive policy response from the US Federal Reserve (Fed). Consequently, our current expectation is a further 75 basis points (bps) of easing, which would bring the federal funds rate to 4.25% (upper bound) by the end of 2024. Looking to 2025, we now anticipate that the policy rate will reach 3% before the end of the year.

Three important themes to highlight

  • Labour market data releases will likely be volatile events for financial markets.
  • As long as the US economy holds up, easier monetary policy in the form of lower rates generally favours riskier investment assets, short-term volatility notwithstanding.
  • Other global central banks, particularly those in emerging markets, will likely feel more comfortable pursuing their own easing cycles with the Fed having taken a definitive step in that direction as well

The US Fed kicked off its long-awaited monetary easing cycle with a bang yesterday, electing to reduce its policy rate by 50 bps. While the size of the rate cut wasn’t officially factored into many Fed forecasters’ base-case scenarios, it wasn’t a real ‘surprise’ decision either. Over the past several days, market positioning had already been skewing toward the prospect of a 50-bps cut coming out of the Fed’s September meeting, as various prominent (and mostly well-informed) members of the financial press began to suggest that it was, in fact, likely to be a much closer call than the consensus 25-bps cut that had been priced into markets following last week’s Consumer Price Index (CPI) inflation print.

The Fed’s latest Summary of Economic Projections (SEP) was largely unhelpful

Here are our takeaways from the Fed’s latest SEP, released yesterday:

  • The Fed’s dot-plot chart, which summarises where the central bank expects its policy rate to be going forward, actually reads somewhat hawkish, at least relative to current market positioning. The Fed is telegraphing another 50-bps of rate cuts between now and the end of 2024, implying a slower easing cycle in its final two meetings of the year. The range of potential outcomes provided by Fed forecasters reinforces this view, suggesting that less than 50 bps would be the next most likely scenario. The expectation for 100 bps of easing in 2025 remained unchanged, while two additional rate cuts (which would bring the federal funds rate to 3%) are now baked into 2026. While we agree with the destination, we expect the Fed’s journey there to be faster.
  • The rest of the forecasts within the range of potential outcomes almost look like they were calibrated to give the Fed maximum optionality and flexibility in its decision-making process: all were characterised by a more benign inflation profile, trend-like GDP growth, and a higher unemployment rate signalling some incremental, but by no means alarming, cooling of the labour market.

The Fed’s post-meeting statement and press conference were more telling

We’d instead turn our attention to the Federal Open Market Committee (FOMC)’s post-meeting statement and press conference. Since Fed Chair Powell’s Jackson Hole speech, there has been a clear move away from the Fed being purely focused on driving down inflation toward reemphasising the other part of its dual mandate: full employment (i.e., a healthy job market). The FOMC essentially codified this shift in yesterday’s statement, adding the line “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2% objective.”

In our view, the implication of this addition is that, while the base-case outlook is for gradual policy easing, there appears to be a low bar for the Fed to move more aggressively in cutting rates than what’s being telegraphed as of this writing.

The size and shape of this easing cycle depend on whether we see downside surprises to the labour market and consumer data

We suspect that such scares may indeed occur in the months ahead. If the US economy cools–and we maintain that it probably will–there may be future points at which some of the economic data surprises to the downside, potentially triggering a more aggressive policy response from the Fed.  Consequently, our current expectation is for a further 75 bps of easing, which would bring the federal funds rate to 4.25% (upper bound) by the end of 2024. Looking to 2025, we now anticipate that the policy rate will reach 3% before the end of the year; we’d previously called for the federal funds rate to hit our estimate of neutral a couple of quarters into 2026.

So, the Fed has finally begun easing–now what? 

We see three important themes worth highlighting now that the Fed’s easing cycle is finally underway:

  • Labour market data releases will likely be volatile events for financial markets. Investors will assess the shape of the easing to come based on key labour market releases such as nonfarm payrolls, the Job Openings and Labor Turnover Survey (JOLTS), and jobless claims. Gauges of consumer confidence like retail sales are another potential flashpoint to watch.
  • As long as the US economy holds up, easier monetary policy in the form of lower rates generally favours riskier investment assets, short-term volatility notwithstanding. While we do expect the economy to cool, we also acknowledge that the farther along the easing cycle path the Fed gets before seeing signs of economic weakness, the longer the landing strip for that elusive ‘soft landing’ becomes.
  • Clearly, this Fed meeting and its potential ripple effects aren’t just about the United States. Other global central banks, particularly those in the emerging markets, will likely now feel more comfortable pursuing their own easing cycles with the Fed having taken a definitive step in that direction as well. Recall that during the first half of 2024, a short-lived high-inflation, strong-growth environment effectively took Fed rate cuts off the table for the rest of the year, driving the US dollar higher and forcing other central banks’ nascent easing cycles to pause. Bank Indonesia was a good example, having already cut its policy rate in anticipation of the Fed soon slashing its rated.  

 

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  • A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in.  This may adversely affect its return and performance.
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  • RMB is not freely convertible and is subject to exchange controls and restrictions.
  • Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
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  • This website is not intended for use by any individual in any jurisdiction where, due to their nationality, residence, foreign exchange control or other circumstances, the publication or access to this website is restricted or prohibited. It shall be the sole responsibility of the investor to acquaint themselves with, and to comply with, all applicable laws and regulations of any relevant jurisdiction.
  • Funds offered on this platform may invest in equity, fixed income securities, exchange-traded funds, collective investment schemes and/or other instruments, including derivatives, and each of which has its specific investment objective/ policy with its specific features and different risk profile.
  • Distribution of dividends, the frequency of distribution and the amount/rate of dividends are not guaranteed. Dividend of certain share/unit classes, at the fund or the investment manager’s discretion, may be paid out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share/unit of the respective share/unit classes after the distribution date.
  • Some funds may invest in bonds or debt securities which may be subject to credit, liquidity, counterparty and market risks.
  • Some funds may invest in non-investment grade bonds and unrated securities which may be subject to greater credit and liquidity risks, and may be more volatile than higher rated securities. Some funds may invest in investment grade debt securities, which may be subject to ratings downgrades by the rating agencies that may affect the net asset value of the fund.
  • Some funds may invest in derivative instruments which may involve additional risks. (For example, leverage may cause greater volatility.)
  • Some funds may make extensive use of derivatives including more complex derivative instruments or strategies to achieve the investment objective, this may give rise to additional exposure in that performance may rise or fall more than it would have done otherwise. In adverse situations, the fund’s use of derivative instruments may become ineffective and the fund may suffer significant losses. The use of derivatives may give rise to leverage, liquidity, counterparty and valuation risks.
  • Some funds may invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
  • Some funds may invest in securities of small and/or medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
  • Some funds may invest in a single country/region and/or a particular industry sector which may be concentrated and subject to greater risks than diversified investments in several countries and/or regions and across sectors.
  • Some funds may invest directly in certain China A shares via the Stock Connect, which may involve risks related to investments via the Stock Connect and Mainland China investment.
  • Some funds may have significant exposure to Renminbi ("RMB") bonds/equity/assets or emerging markets, which will be subject to debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with more established markets.
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  • Some funds’ performance will be closely tied to the economic, political, regulatory, geopolitical, market, currency or other conditions in the European Economic Area and may be subject to increased liquidity, price, and foreign exchange risk.
  • Some funds may invest in Russia and some investments in Russian securities may be unlisted securities not dealt on a regulated market. The Russian market presents specific risks in relation to the settlement and safekeeping of securities.
  • Investment involves risk. Investors may expose to capital loss and should not invest solely based on the information on this website alone and should read the offering documents for details including the associated risk factors, charges and features of the funds and their share/unit classes. Past performance information is not indicative of future performance.


Manulife Global Fund

  • Manulife Global Fund is an umbrella fund comprising a number of sub-funds investing in equity and/or fixed income securities, each of which has a different investment objective and risk profile and may involve equity market,  geographical concentration, sovereign debt, liquidity, volatility, credit downgrade, interest rate, counterparty risks. Certain investors may also be subject to the risk relating to RMB hedged share class.
  • The relevant distributing class of the sub-funds does not guarantee distribution of dividends, the frequency of distribution and the amount/rate of dividends. Dividends may be paid out of income, realized capital gains and/or out of capital of certain sub-funds in respect of Inc share class(es). Dividends may be paid out of realized capital gains, capital and/or gross income while charging all or part of their fees and expenses to capital (i.e. payment of fees and expenses out of capital) in respect of MDIST (G), R MDIST (G) and F MDIST (G) share class(es).  Dividends paid out of capital of these sub-funds amounts to a return or withdrawal of part of the amount of an investor’s original investment or from any capital gains attributable to that original investment and may result in an immediate decrease in the net asset value per share in respect of such class(es) of the sub-funds. Fixed yield share classes pay out a pre-determined annualized fixed percentage of their NAV, which can be adjusted by the Directors with at least one month’s prior notice, do not entirely reflect the actual or expected income or performance of the Fund. These distributions may exceed the actual income, leading to capital erosion, especially during negative returns or losses, and may reduce future capital growth. A positive distribution yield does not guarantee a positive return, and the absolute distributions vary with the NAV, resulting in fluctuating monthly payouts for investors.
  • Certain sub-funds invest in emerging economies or markets, where special risks, including liquidity, volatility, government policies, taxation, currency, currency repatriation, political and regulatory risks, may be substantially higher than the risks normally associated with more developed economies or markets.
  • Certain sub-funds invest in securities of small and medium sized companies in the relevant markets. This can involve greater risk than is customarily associated with investments in larger and more established companies.
  • Certain sub-funds concentrate their investments in a single country and/or a particular industry sector are subject to greater risks than diversified investments in several countries and/or regions and across sectors.
  • Certain sub-funds may invest directly in certain China A shares via Stock Connect, which may involve in risk related to Investments via Stock Connect and Mainland China investment.
  • Investment involves risk. The sub-funds may expose their investors to capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds and their share classes.
  • Each sub-fund intends to use financial derivative instruments (“FDIs”) for investment, efficient portfolio management and/or hedging purposes.  The use of FDIs exposes the Fund to additional risks, including counterparty/credit risk, liquidity risk, valuation risk, volatility risk and over-the-counter transaction risk. 
  • Given RMB is currently not a freely convertible currency,  payment of redemptions and/or dividend payment in RMB may be delayed due to the exchange controls and restrictions applicable to RMB. As offshore RMB (CNH) will be used for the valuation of RMB denominated Class(es), CNH rate may be at a premium or discount to the exchange rate for onshore RMB (CNY) and there may be significant bid and offer spreads and thus the value of the RMB denominated Class(es) will be subject to fluctuation.  Any devaluation of RMB could adversely affect the value of investors’ investments in the RMB denominated Class(es) of certain sub-funds.


Manulife Advanced Fund SPC

  • Manulife Advanced Fund SPC is an umbrella fund comprising a number of sub-funds investing primarily in equity and bond securities, each of which has a different investment objective and risk level.
  • The sub-funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. A sub-fund may at its discretion pay dividend out of capital or gross income while charging / paying all or part of its fees and expenses out of its capital. This amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the net asset value per share of the respective share classes after the distribution date.
  • Certain sub-funds with significant exposure to Renminbi (“RMB”) bonds/equity/assets or emerging markets, may involve debt instrument, credit/counterparty, concentration, liquidity, volatility, currency, tax, economic, foreign exchange/multi-currency conversion, down-grading, regulatory and political risks and these risks could be substantially higher than the risks normally associated with the world's more established markets.
  • A bond sub-fund may hold a significant portion of assets in deposits if there are not sufficient RMB instruments for it to invest in.  This may adversely affect its return and performance.
  • Certain sub-funds using invest directly in debt instruments/shares via QFII regime, the Bond Connect and/or the Foreign Access Regime are subject to various requirements and restrictions under the laws of Mainland China related to investment in QFII and/or China Interbank Bond Market and custodial risks.
  • RMB is not freely convertible and is subject to exchange controls and restrictions.
  • Certain sub-funds may have significant concentrated exposures to particular industry sectors and geography's, which subjects investors to concentration and equity market risk.
  • Certain sub-funds may invest in equities of small- and mid-capitalization companies, which can expose investors to liquidity and volatility risks, and is subject to greater risk than is customarily associated with investments in larger capitalization companies.
  • Investment involves risk. The sub-funds may expose to a high risk of capital loss. Investors should not invest solely based on this material and should read the offering document for details including the risk factors, charges and features of the sub-funds.


Manulife Hong Kong Series

  • Manulife Hong Kong Series (“the Series”) is an open-ended unit trust comprising a number of funds primarily investing in equities, debt securities, exchange-traded funds and/or collective investment schemes, each of which has a different investment objective and risk level.
  • The funds do not guarantee distribution of dividends, the frequency of distribution, and the amount/rate of dividends. Dividends may be paid out of capital and/or out of gross income of certain funds in respect of Inc classes, while charging/paying all or part of certain funds’ fees and expenses to/out of capital of certain funds. This represents a return or a withdrawal of part of an investor's original investment amount or capital gain attributable to that amount. Distributions will result in an immediate decrease in the net asset value of the relevant units. Class AA (RMB) Inc Hedged Unit of certain funds is subject to higher distribution risks than other non-hedged unit classes.
  • Certain funds may involve equity market, emerging markets, Dim Sum bond market, concentration, volatility, liquidity, credit, credit ratings, below investment grade and unrated securities, credit rating downgrading, interest rates, valuation, sovereign debt, unlisted debt securities, political and regulatory, currency, foreign exchange, derivative and structured product, hedging, and distribution risks. Certain investors may also be subject to the risk relating to RMB hedged share class..
  • Certain funds are subject to the risks of investing in other funds and the risks relating to asset allocation strategy and/or downside risk management process.
  • Certain fund is subject to the risks relating to investment in exchange traded funds, Strategic and Tactical Asset Rebalancing Strategy (“STARS”), small- and mid-capped companies, convertible bonds and the risks associated with securitised debt instruments and investments in loss-absorption features. Certain fund is a feeder fund that invests all or substantially all of its assets in another collective investment scheme (the “master fund”) and is therefore subject to the risks of investing in the master fund.
  • Certain fund will not have direct investments other than cash, cash equivalents and financial derivative instruments (such as futures, options and forwards).
  • Investment involves risk. The funds may expose its investors to capital loss. Investors should not make investment decisions based on this material alone but should read the offering document for details, including the risk factors, charges and features of the Fund and its unit classes.
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