The FED lowers rates by 0.5%, the Savings Portfolio USD to 4.5%

At its last meeting, the FED decided to cut interest rates by 0.50%, in line with market expectations. For the first time since 2005, one of its members, Michelle Bowman, officially expressed her disagreement, preferring a cut of only 0.25%.

This cut has generated much debate. With the federal funds rate at 5.25/5.50% and inflation now running at 2.5%, the decision seems more than justified. However, central banks generally do not cut by 50 basis points unless there is a significant urgency, such as a recession. Typically, when the cut is justified only by lower inflation, the cut is 0.25%.

Even though the US economy is still doing quite well (the Atlanta Fed is forecasting GDP growth of 2.9% for this quarter), the Fed has opted for a bigger cut. The dynamics of this economic cycle are very different from those of the past.

At the September meeting, the Federal Reserve also presented a set of its members’ forecasts for interest rates and the economy for the coming years. Regarding interest rates, the board members forecast:

– An additional 0.5% cut this year

– A total cut of 1% in 2025

– A total cut of 0.5% in 2026

According to this FED forecast (which is by no means a guarantee that it will come true), interest rates would be around 3% by the end of 2026, which is the level that, according to FED members, represents long-term equilibrium rates.

Will we return to 0% rates?

The crucial question is: are we returning to the zero-interest rate policy (or even negative in Europe) of the years between 2008 and the pandemic, or should that be considered a historical aberration?

Powell seems to believe the latter, as he mentioned that “the neutral rate appears to be significantly higher than it was.”

Many commentators now put the neutral rate at around 3-3.5% in the US and 2.5-3% in Europe.

As for the FED’s other economic projections:

– Inflation is expected at 2.3% in 2024 (up from 2.6% in the previous forecast in June), 2.1% in 2025 (up from 2.3%), and 2.0% in 2026 (same as before).

– Unemployment is projected at 4.4% in 2024 (up from 4.0%) previously, 4.4% in 2025 (up from 4.2%), and 4.3% in 2026 (up from 4.1%).

In summary, there is a slight increase in expectations of unemployment growth and a reduction in inflation, in line with the decision to cut by 50 basis points.

What will happen now to interest rates?

Much of what happened was already expected.

There is a chance that the yield curve will steepen further, meaning that short-term rates will decline, but the gap with long-term rates could widen. Therefore, there is no clear relationship with long-term bonds, while the short and middle part of the curve could continue to attract buyers who want to lock in rates for a longer time.

The Yield of the savings portfolio in USD is now 4.50%

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 changes in the price of the funds in the portfolio that are not affected by this decision. The Yield of the Savings Portfolio USD will be adjusted to 4.50% in line with yesterday’s FED decision.

Important note: this discount may take a few days to be fully effective, but as a precaution we announce the reduction immediately.

In any case, it remains a historically very interesting Yield.

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 portfolios with target returns and bond portfolios that allow for extending exposure to longer maturities/durations.