THE US CENTRAL BANK SURPRISES INVESTORS

18.12.2023 Last week the US central bank, the Federal Reserve, surprised investors with its optimistic outlook on inflation. Below we look at the implications.

By abandoning its forecast for a final end of year rate hike, and penciling three rate cuts for 2024, the US Federal Reserve has switched the focus to when monetary easing will begin. This shift in stance was further emphasized by Chairman Powell when he said that the US central bank would not wait for inflation to fall back to its 2% target before it started cutting interest rates.

The change of approach suggests that it is confident that growth is slowing and that core inflation (inflation excluding food and energy), which is currently 4 percent, is on its way back down to 2 percent.

The switch in focus by the Federal Reserve has the effect of underwriting growth in the world’s biggest economy. The central bank is currently forecasting growth of 1.4% in 2024. So, there is little doubt that if the US economy started to stagnate it would be very aggressive in cutting interest rates.

The market implications of this pivot are two-fold. Firstly, as the focus switches towards lower interest rates and supporting growth in the world’s largest economy it should trigger a re-rating of growth shares. Additionally, it is also likely to put pressure on European central banks, as time goes on, to accelerate a switch to cutting interest rates. Currently they are focused on getting inflation down and are refusing to countenance any discussion of rate cuts.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin