The size of the interest rate cut is perhaps less important than the end goal, says JP Morgan’s global market strategist, Kerry Craig.
Instead, the message from the US Federal Reserve (US Fed) in its Sept 19 decision to cut interest rates by 50 basis points (bps) is more about a cautious approach rather than immediate urgency, opting to front-load cuts within a relatively unchanged easing cycle.
“What’s impressive is Chair Powell's communication, which effectively balances the urgency of returning to a neutral interest rate with the acknowledgment of a relatively stable economic state, despite some softness in the job market,” says Craig.
He notes that the Fed has shifted its focus more towards employment rather than inflation, reflecting a jobs-first approach.
Criag and his team advise caution in over-relying on the dot plot, given the diverse views among participants and how shifts in economic data could sharply alter these perspectives.
The economist notes that the additional 150 bps easing shown in the Statement of Economic Projections through the end of 2025 suggest a policy rate between 3.25%-3.50%, aligning closer to the US Fed’s view of neutral by 2026.
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“The US economy is not in a bad spot: financial conditions are not tight, and there is little evidence of large economic imbalances that could trigger a recession,” says Craig.
He says that inflation is tracking towards 2% on the consumer price index (CPI) index and may soon reach it based on the PCE measure of inflation.
Meanwhile, Craig says that the economy is strong enough to continue to produce job growth, although at a slower pace. “The US economy appears to be in a mid-to-late cycle stage, growing at a trend-like pace of around 2%. While this is not a goldilocks outcome, it is a positive one considering the economic distortions of the past few years,” he adds.
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On investment implications, Craig and his team prefer to remain overweight towards risk assets in both equities and credit, given the low risk of recession.
He says that investors should be conscious of valuations and earnings growth potential across the equity markets.
“Even at high valuations, the US equity market represents a quality bias that may be a wise choice for portfolios, with opportunities in sectors like utilities and financials. Defensive sectors may benefit from falling bond yields, while the distinctions between growth and value blur,” says the economist.
In Asia, markets are finding their footing as central banks start to ease to support domestic growth. Earnings growth in Japan is picking up, and for investors wanting to adopt a more defensive approach, they could focus on where to find income around the region, says Craig.
Finally, on fixed income, central bank rate cuts make it challenging to be underweight in duration. The US treasury market offers opportunities, particularly in the belly of the curve, while European bonds and markets with steeper yield curves like Australia, present alternatives, he says.
“Credit remains appealing, with investment-grade and high-yield bonds seen as non-recessionary assets. Spreads are narrow, but yields are respectable, and the reinvestment risk is rising as yields fall. The outlook suggests range-bound yields, with potential downward pressure as the rate cycle progresses,” says Craig.
