Investing in US Bonds in the Face of Fed Rate Cuts
Fed Chairman Powell Warns of Economic Risks
On July 9, 2024, Federal Reserve Chairman Powell stated that keeping interest rates high for too long could jeopardize economic growth in the USA.
During a two-day hearing at the American Senate, the central bank leader highlighted that the economy remains strong, along with the job market, despite recent cooling from the latest macroeconomic data.
Powell mentioned a trend of easing inflation, yet remained firm in returning inflation to the Fed’s 2% target.
He emphasized that high inflation is not the only risk to address, pointing out the potential economic activity and employment weakening due to monetary restrictions being lifted too late or too little.
Unlike the ECB, the Fed operates under a “dual mandate” of inflation control and unemployment rate control.
The Fed’s current overnight rate ranges between 5.25% and 5.50%, the highest level in 23 years, following 11 consecutive increases after inflation peaked in the early ’80s.
Recent inflation data, particularly from May, has been encouraging, with the PCE indicator at 2.6% after a peak over 7% in June 2022.
Moreover, June 2024’s consumer inflation data came in lower than expected, indicating negative monthly inflation (-0.1%) against analysts’ positive forecasts (+0.1%).
The Treasury yield curve fell post-14:30 data release, reflecting optimistic reactions to growing disinflation expectations, potentially leading to two 25 basis points rate cuts by the end of the year.
Market Considerations
Anticipated short-term interest rate cuts strengthen bullish reasons in the stock market, even after a strong run in US stocks.
Amid upcoming earnings reports and political uncertainty, a potential market correction could provide buying opportunities in US stocks, especially following Powell’s remarks on rate cuts.
The bond market outlook involves declining yields across the Treasury curve, with a focus on long-term US Treasuries and a potential USD depreciation.
Recommending the Amundi US Treasury Bond Long Dated, ISIN LU1407890976, an ETF hedged against EUR, suitable for diversified bond portfolios and medium to high-risk profiles.
Consider these insights alongside personal risk tolerance and investment horizon.
This information serves solely for informative purposes and not as investment advice.
Readers are urged to make investment decisions independently, considering individual risk appetites and goals.
