Vantage Point: Finding Value  

Will the Fed cut rates – and should it?

  • To be able to explain what the latest US economic data may mean for markets
  • To be able to understand the relationship between growth and inflation
  • To be able to explain the relationship between monetary policy and inflation
CPD
Approx.30min

Nevertheless, Miller believes that it is important to “signal” to markets and consumers that rates are coming down. 

He cites the example of the US housing market, where transaction levels have been very low over the past year. 

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This is because long-term fixed rate mortgages are the norm in the US, meaning US consumers were insulated from the rise in interest rates if they owned their own home, unlike in the UK where variable or short-term fixed rate mortgages are more common.

But if that has acted as a boost to the US consumer, it has restricted the housing market, says Miller.

This is because individuals on fixed rate mortgages are reluctant to sell their current home to either downsize or buy a bigger house, as doing so would end their current mortgage arrangement and cause them to have to move to a higher rate.

This reduced the desire of construction companies to build new houses.

Miller says that if rate cuts happen, it may lead to more people moving house, which would act as a stimulus to the economy.

Investment implications 

He adds that the corporate sector in the US is also faced with the cost of refinancing debt, either via bank debt, or the bond markets. 

Lower base rates would reduce the cost of borrowing for those companies, which may free up capital to be deployed into productive areas of the economy.  

Boucher adds that from an investment and markets point of view, a reduction in interest rates reduces the attractiveness of cash and government bonds, and so should boost both investment markets and the wider economy. 

Miller says investors anticipating rate cuts in the US have pushed credit spreads to 20-year lows, “so if you believe rate cuts are coming and that the economy will continue to perform, really you have to be in equities, because credit spreads can’t go much lower”.

David Jane runs a range of multi-asset funds at Premier Miton, and says at the moment he is staunchly overweight equities; this is a function of his belief that most asset prices presently reflect the market's view that inflation will fall and rates will be cut. 

In that environment, he feels the best diversifying asset class are short duration assets and equities in particular, as those are more likely to perform well if inflation persists, and are attractively valued right now. 

David Thorpe is investment editor at FT Adviser

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Which data point does Miller say is showing signs of "moderating"?

  2. Where does Boucher see a great divergence in US economic activity?

  3. Which piece of economic data is particularly watched by central banks when considering interest rate policy?

  4. Which current characteristic of the US economy does Gkionakis say is common to other developed economies?

  5. Why does Miller say its important the US cuts interest rates?

  6. What does Jane say is being priced into markets right now?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To be able to explain what the latest US economic data may mean for markets
  • To be able to understand the relationship between growth and inflation
  • To be able to explain the relationship between monetary policy and inflation

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