Markets should prepare for volatility as investors are likely to react against a potential delay in rate cuts from the Federal Reserve, predicts the CEO of one of the world’s largest independent financial advisory and asset management organizations.
The prediction from deVere Group’s Nigel Green comes as US headline inflation comes in at 3.2% in January, higher than expected, and core CPI dropped to 3.8%, also higher than expected.
He comments: “The latest US CPI data reinforces our position that the Fed is almost now certainly not going to cut rates this month; and indeed it could, we believe, delay cutting rates until the third quarter of the year.
“As the markets are seemingly already pricing-in a rate cut in the summer, should there be a push back against this expectation, as we now believe there will be, we’ll see increased volatility across financial markets.”
The cautionary note also comes following the recent data from the Federal Reserve’s favoured metric for inflation – the core personal consumption expenditures (PCE) price index.
Data derived from the PCE index indicates a noteworthy surge in prices in January from the previous month, indicating a departure from the trend before.
“The uptick in the core PCE index inevitably raises concerns about the potential repercussions of inflationary forces, hinting that the surge in prices might compel the US central bank to reassess the timing of interest rate reductions,” says the deVere CEO.
He continues: “It seems that the markets are currently indulging in wishful thinking about a rate cut in June.
“Furthermore, we think that when a shift does occur, and rates are indeed lowered, there will likely be a pause in the subsequent meeting to assess how the policy adjustment is impacting the world’s largest economy.
“If officials observe that the rate cut contributes excessively to market enthusiasm and demand, exacerbating price pressures, we would then anticipate there to be an extended pause.”
While the Fed is becoming increasingly confident about the fall in inflation since its peak in 2022, the central bank remains resolute that the fight against inflation is not over and the trajectory back to its target of 2% might take longer than had previously been predicted.
Nigel Green concludes: “We expect rates will be higher for longer still – and when there is finally a rate cut, there will be a pause to follow it.
“Markets will respond negatively to this predicted scenario, so investors should buckle up and position their portfolios accordingly.”
