Laurie Mount, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how we have maneuvered our strategies in the wake of the Federal Reserve's 25 basis-point rate cut and cautious guidance from Chair Powell, while we continue to closely monitoring Fed communications and economic data.
Watch time: {{ formattedDuration }}
View transcript
Welcome back to The Weekly Fix. My name is Laurie Mount, Portfolio Manager with RBC’s BlueBay U.S. Fixed Income team focusing on cash management strategies.
Last week, as expected, the Federal Reserve delivered a 25 basis-point cut to the fed funds rate, bringing the target range to 3.75–4.00%. This meeting had dissents in both directions, with Kansas City Fed President Jeff Schmid voting to hold rates steady and Governor Stephan Miran dissenting for the second straight meeting in favor of a 50 basis-point cut.
In their post-meeting statement, Fed policymakers on Wednesday repeated their assessment that “job gains have slowed” and that “risks to employment rose in recent months.” Officials also characterized economic growth as “moderate” stating inflation “has moved up since earlier this year and remains somewhat elevated.”
In his opening comments at the press conference, Chair Powell cautioned investors against assuming the US central bank would follow its second straight interest-rate cut with another in December stating “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.” Markets quickly responded to this comment by almost entirely reducing the odds another 25 basis-point cut in December.
When pressed on his comments about the December meeting, Powell pointed to divisions on the committee saying that “For some part of the committee it’s time to maybe take a step back and see whether there really are downside risks to the labor market, or see whether, in fact, the stronger growth that we’re seeing is real.”
Powell also addressed the impact of the ongoing government shutdown on economic data releases. He noted that if there is no new data before December, the Fed might proceed cautiously, saying “If you’re driving in the fog, you slowdown.”
The Fed is clearly divided about the outlook for policy, as reflected in the two dissents in opposite directions and Powell’s comments during the press conference. Some officials are wary of inflation and are willing to take a more cautious approach to cuts as they assess whether downside risks to the labor market intensify while others fall in the opposite camp. This uncertainty has led to record-high money market balances of $7.82 trillion, as investors adopt a wait-and-see approach.
In response to this environment, our cash strategies focus on identifying opportunities in floating-rate securities and shorter-duration fixed-rate instruments with maturities under one year. We are positioning for a lower rate environment while closely monitoring Federal Reserve communications and available economic data for insights into the policy outlook and market implications.
As the government shutdown continues into its second month, we remain vigilant, adapting our strategies to navigate the evolving landscape.
As always, thank you for joining us today and have a great week.
Key points
The Federal Reserve cut the fed funds rate by 25 basis-points to a target range of 3.75–4.00%, with dissents from the Kansas City Fed President wanting to hold rates steady and Fed Governor Miran, who favored a 50 basis-point cut.
Fed Chair Powell cautioned against assuming another rate cut in December, citing divisions within the committee and the need to assess labor market risks and economic growth. Markets responded by reducing expectations for a December cut.
In response to this environment, our cash strategies are focused on identifying opportunities in floating-rate securities and shorter-duration fixed-rate instruments with maturities under one year, while closely monitoring Fed communications and economic data amid ongoing uncertainty.