No rate cuts by Fed until 2025?

There’s a legitimate risk that there will be no US interest rate cuts by the Federal Reserve this year, warns the CEO of one of the world’s largest independent financial advisory and asset management organisations.

The warning from Nigel Green of deVere Group comes as the Federal Reserve’s primary inflation gauge, the core PCE (personal consumption expenditures) price index rises to 2.7%, above expectations of 2.6%. Core PCE inflation was 2.8%, above expectations of 2.6%. 

The deVere CEO comments: “This data represents another blow for the Federal Reserve and its battle against inflation.

“The latest reading from the Fed’s preferred gauge, PCE, underscores how inflation remains hotter than previously expected, despite the high interest rates which are being used as a weapon to try and cool it.”

He continues: “With the US economy defying expectations by consistently remaining strong, with a strong labor market, rising PPI and CPI, and with today’s PCE, among other recent data, we are now revising our rate cut forecast.

“We believe that the cautious US central bank officials will need several consecutive months of evidence showing inflation is really heading back to the 2% target before they pivot on monetary policy.

“Therefore, as it stands, there’s a considerable risk that they will not feel comfortable about cutting rates before 2025.”

Previously, deVere Group had predicted that there would be one cut this year, in the third quarter. 

“Now this PCE data will give the Fed further cause to push back,” says Nigel Green. 

“But we believe waiting until 2025 increases the risk of the central bank of the world’s largest economy making a considerable policy mistake – especially in terms of the stability of the labor market and the regional banking sector.”

As interest rates are likely to remain elevated for a longer duration than previously anticipated, investors need to recalibrate their portfolios to mitigate risks and capitalize on emerging opportunities.

“Firstly, investors should consider reallocating their portfolios to sectors that typically perform well in a rising interest rate environment. 

“Historically, sectors such as financials, industrials, and materials have outperformed during periods of higher interest rates,” says the deVere CEO.

“Financial companies tend to benefit from wider net interest margins, while industrials and materials often see increased demand as economic activity picks up pace.

“Conversely, sectors that are sensitive to interest rates, such as utilities, real estate, and consumer staples, may face challenges in a higher-for-longer interest rate environment. 

“Utilities and real estate companies, for example, often carry significant debt loads, making them vulnerable to rising borrowing costs. Similarly, consumer staples companies may experience pressure on profit margins as borrowing costs increase.”

Diversification remains key for investors looking to navigate the complexities of a shifting interest rate landscape. 

By spreading risk across different asset classes and sectors, investors can mitigate the impact of interest rate fluctuations on their portfolios. 

“Bonds with shorter durations may also offer some protection against rising interest rates, as they are less sensitive to changes in yields compared to longer-term bonds,” he notes.

Nigel Green concludes: “With there being a real possibility of no rate cuts this year, investors might need to adjust their portfolios to adapt to the higher-for-longer environment to mitigate risk and to seize the opportunities.”

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