December’s meeting of the FOMC proved somewhat more hawkish than investors expected, and market pricing now sees the federal funds interest rate at 4% by the end of 2025. This follows something of a roller coaster year, with expectations peaking at over 4% in April before dropping below 3% in August, when increasing signs of labour market weakness were the primary concern. Now, with sticky inflation and continued job market gains, committee members have moved their focus to the inflation side of their dual mandate. In the meeting that finished on December 18, the median voter upgraded their view (relative

The Bank of England joined the group of central banks that have cut interest rates this year when it trimmed Bank Rate from 5.25% to 5.0% on 1 August. The Federal Reserve, meanwhile, left the fed funds rate unchanged when it concluded its two-day meeting a day earlier. Jerome Powell did, however, indicate that a reduction may be on the cards soon. But when the Fed does start cutting rates, how gradually and how far will it go – and what are the implications for investors? Previous Fed rate-cutting episodes may not offer that many clues. The length of rate-cutting

The FOMC increased its benchmark interest rate by 25 basis points after its July meeting, as had been widely anticipated. There was no surprise, either, in the accompanying statement, which differed little from June’s. However, there was a change of tone in the press conference that followed. In response to a question, Jay Powell said that the Fed staff are no longer forecasting a recession. Market participants have increasingly priced in this type of ‘soft landing’ scenario. Despite still-high inflation, risk assets have done very well this year alongside expectations for relatively steep interest rate cuts next year. Such an

Despite the surprise 1.4% contraction in the US economy in the first quarter, the US labour market remained very strong in April. Nonfarm payrolls increased by 428K, with private service-providing and manufacturing jobs up 340K and 55K respectively. The three-month average gain in nonfarm jobs is a very solid 523K. The unemployment rate remained extremely low at 3.6%, although it was flattered by a 0.2% decline in the labour force participation rate. Average hourly earnings growth remained robust at 5.5% on a twelve-month basis. Amid very high inflation and a robust jobs market, the Federal Reserve stepped up the pace

In an earlier article, ‘Behind-the-curve Fed signals more rate hikes’, Fathom Consulting reflected on the careful balancing act that the US Federal Reserve must perform as it embarks on a series of rate hikes. Tighten too quickly and it risks tipping the economy into recession; tighten too slowly and upward price pressures could become entrenched, requiring an even quicker pace of tightening down the line that could prove more costly. For emerging markets, where central banks typically have less credibility, the balancing act is much more precarious, forcing them to start the tightening cycle much sooner, and harder, in order

The US Federal Reserve’s loose monetary policy and the relative unattractiveness of fixed income assets has encouraged investors into US equities, increasing equity prices. As a consequence, the cyclically adjusted price-to-earnings ratio (CAPE) for the S&P 500 is now within the top 95% of all historical values. The last time it was this high was during the dot-com bubble. Historically, we find that CAPE is negatively related to future returns, and when CAPE has been around the values seen today, the next ten years tend to see either very low or negative growth in average returns. It is difficult to