Weekly Buzz: ✂️ More rate cuts – this year and the next

5 minute read

Markets are pricing in nearly a 100% chance that the US Federal Reserve (Fed) will cut interest rates by 0.25 percentage points when it meets next week – a continuation of its ongoing rate-cut cycle. But there's a bigger story here, one that will carry into 2025.

Finding the sweet spot

After years of rate hikes to combat inflation, the Fed is entering a new phase. Two key factors are driving this shift: inflation is cooling (though it's still above the central bank’s 2% target), and the US job market is  slowing down.

While non-farm payrolls (our Simply Finance explains this term) climbed to 227,000 last month, beating estimates, the broader trend shows that hiring is slowing. Meanwhile, November's annual inflation rate came in at 2.7%, slightly up from October, but still well below the peaks we saw in 2022. Together, these signals suggest the Fed has room to gradually bring rates down.

Ultimately, the Fed’s trying to go for the "neutral rate" – that sweet spot where interest rates neither restrict nor stimulate the economy too much. Unlike previous cutting cycles that often started during economic stress, the Fed now has the luxury of lowering rates while the economy remains robust.

It’s important to note, however, that the president-elect’s proposed measures – particularly on trade tariffs – may throw a wrench into the works. Higher tariffs could push prices up and reignite inflation, forcing the Fed to reconsider its rate-cutting timeline.

What’s the takeaway here?

Rate cuts benefit both stocks and bonds, but context matters. While a "soft landing" – where inflation cools without the economy taking a big hit – is panning out, the positive effects will depend on how fast the Fed moves. December's cut is almost certain, but the Fed's path through 2025 isn't set in stone, and you can expect a more measured approach.

As rates fall, keeping cash will become less attractive: savings accounts and fixed deposit yields tend to follow central bank rates. Now might be the time to consider putting your cash to work in a portfolio of assets that can capture greater growth – something like our General Investing portfolios.

📰 In Other News: China’s problem with prices

While much of the world battles inflation, China is grappling with a very different problem: deflation. A three-year crisis in its property sector has dented household wealth and buying confidence, and that’s brought about less consumer spending, leaving prices stagnant since early 2023. Figures for November showed annual inflation in China declining to a five-month low of 0.2%, despite a raft of recent stimulus. 

Prolonged deflation can lead to a downward spiral. Consumers – anticipating further price drops – may opt to delay purchases. Businesses, in turn, will cut down on production and investment. To top it off, falling prices generally lead to lower revenues for companies, hitting wages and profits.

But China’s policymakers aren’t just sitting still. In addition to a plan for increased government spending, the country’s central bank announced that it will be more willing to trim interest rates, and reduce the amount of money that commercial banks are required to hold in their reserves. That’s two big steps aimed at getting consumers and businesses borrowing, investing, and spending again.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Non-farm payrolls

The term "non-farm payrolls" might sound odd, but it's actually quite straightforward: it's simply the total number of jobs added in the US, excluding farms. The monthly report leaves out the farming industry because it changes dramatically with the seasons, which would make the overall employment picture much more volatile. So when you read that "non-farm payrolls have increased by 200,000," that simply means the US economy added 200,000 new jobs that month – just don't count the farmers.