On 11/07/2024, the Fed decided to lower rates by 0.25%, as expected. This means that, starting today, borrowing money will cost a little less.
Given that inflation came back towards the 2% objective, the central bank is now lowering rates with the main objective of preventing the labor market from slowing down too much.
Source: Bloomberg
In the statement explaining the FED’s decision, there was not much new compared to the one from the last meeting.
Powell’s press conference was also quite uneventful, with only one moment of tension when, asked if he would step aside if Trump requested it, the Fed chairman tersely replied “no.”
Indeed, it’s almost sure that Powell, who has had moments of tension with Trump in the past, will not be reconfirmed by the new President. Some had speculated that he might be removed even before the end of his term.
Everyone wanted to understand from this meeting whether Powell intended to continue lowering official rates or not, and at what pace.
When asked about his thoughts on the rise in long-term Treasury yields, Powell said these are attributable to an upward revision of growth expectations and not to an increase in inflation expectations, which is substantially true.
In practice, the Fed intends to continue reducing rates but doesn’t want inflation expectations to increase, especially in the context of new administration policies that could push prices up. For now, however, no significant increases in inflation expectations have been recorded.
He also said that monetary conditions are still restrictive, as official rates are above the long-term neutral rate. It is believed that long-term equilibrium rates, although this is a theoretical topic that is very difficult to demonstrate, are around 3%.
Current levels are still higher, so the Fed would have room to cut them further.
Powell’s attitude is likely compatible with another 25 basis point cut and then a pause, also to see in which direction Trump’s measures will go. The market is now pricing a 0.25% cut at the December meeting, with a 70% likelihood.
The Yield of the savings portfolio in USD is now 4.25%
As for our USD savings portfolio, interest will accrue at a slightly lower rate due to the decrease in official rates. There will be no change in the price of the portfolio’s funds, which will not be affected by this decision. The Yield of the USD Savings Portfolio will be adjusted to 4.25%, in line with the FED’s decision.
Important note: this reduction may take a few days to be fully effective, but, out of prudence, we are announcing the reduction immediately.
In any case, it remains a historically very interesting Yield (see chart at the beginning of this post) and very competitive compared to the interest on deposits and remunerated accounts, even for the case that concerns us in this post in the dollar currency.
For investors who prefer to lock in a given return for a longer period (and accept a little more risk), we remind you that we have a full range of target return portfolios and bond portfolios that allow for longer exposure to longer maturities/durations.
