“The time has come” for interest rate cuts, according to Federal Reserve Chair Jay Powell’s message at the annual Jackson Hole Economic Symposium in late August. With that, the Fed appears all but certain to cut interest rates for the first time in more than four years when officials meet later in September. Now that the timing of this action seems clear, investors confront another important question: How far and how fast will rate cuts go?
Morgan Stanley’s Global Investment Committee believes the Fed can achieve the widely hoped-for “soft landing” of not-too-fast, not-too-slow economic growth and subdued inflation. This scenario likely calls for slow and shallow rate reductions, in quarter-point increments toward 3.5% by the end of 2025.
That approach may disappoint investors hoping for deeper, faster cuts that push the policy rate below 3%, potentially supporting higher equity valuations. However, the S&P 500 is already richly valued and Wall Street’s consensus earnings forecasts look ambitious, given that economic growth is likely to cool. As such, we are proceeding with cautious optimism and maintaining our slow-and-shallow outlook for rate cuts. Here are four reasons why:
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1Decoding the labor market may prove vexing for the Fed.
While job openings are falling and soft data suggests jobs are harder to find, unemployment claims and layoffs have remained benign. Consumer sentiment, often strongly correlated with employment prospects, has moved up since mid-summer. And while the unemployment rate has ticked up, that is due mainly to more people participating in the labor market, not weaker job creation. This mixed picture complicates the task for a data-dependent Fed that must carefully calibrate policy decisions based on how quickly the labor market appears to be cooling. If the cooling is gradual, slow and shallow rate cuts are likely warranted. But a rapid cooling of job prospects would risk recession and indicate that the Fed has miscalculated.
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2It’s unclear how much rate cuts will help the economy.
Consider that more than 5 percentage points of Fed rate hikes since March 2022 have done little to mute aggregate demand in the face of an ample money supply, strong corporate and household balance sheets, and aggressive fiscal stimulus. Small businesses, low-income households and the embattled commercial real-estate sector may get some breathing room from initial Fed rate cuts. However, much of that support may be offset by loss in investment income and a diminished “wealth effect” (i.e., when people feel more financially secure due to rising home and/or portfolio values and thus are more likely to spend).
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3Economic and market indicators are signaling caution.
The S&P 500 has largely recovered from its early-August swoon, despite a retreat last week, but two indicators that typically rise in tandem with the index have turned down: Job openings have plummeted and economic-surprise indices, which measure the extent to which data are beating or missing consensus forecasts, have skewed negative. Similarly, other corners of the market are showing more skepticism about the goldilocks scenario. Commodities such as oil and copper are down, as is the U.S. dollar, while “safe-haven” gold is on a tear, signaling that there is a slight chance of a recession.
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4The AI premium is fading.
After powering the S&P 500 to new heights over the past two years, semiconductor stocks and other AI-linked names recently sold off, weighing heavily on the index. The good news is that recent equity-market gains appear to be shifting from these “Magnificent 7” stocks to many of the other 493 index constituents. Still, with tech’s dominance ending, equity markets may remain vulnerable.
Información extraída de: https://www.morganstanley.com/ideas/fed-rate-cuts-how-much-rate-forecast-2024-2025
