While stock markets are nudging up against all-time highs, part of the reason investors are keen to be set in equities is because they anticipate rates coming down fairly soon. Shares typically respond well to a decline in rates, which usually means borrowing costs decline, consumers have more to spend and profitability increases. But what happens if the anticipated rate cuts are delayed, or are less pronounced than expected?
A recent speech by US Federal Reserve (Fed) Governor Christopher Waller, titled There’s Still No Rush, made the case for going slow in reducing rates. He noted that inflation figures over the past couple of months were disappointing and that the US economy and labour market remain strong. In Waller’s opinion, “it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data.” The Fed’s Summary of Economic Projections released the other week showed that nine of the 19 Fed officials projected two cuts or fewer this year. Nevertheless, Fed Chair Jerome Powell sounded more dovish in his recent press conference and dismissed the inflation news as “bumps.”
If inflation should continue to moderate as Powell implied, what’s the rush to lower interest rates if the economy is strong?
Meanwhile, we are now in April, which means that in the US, the Q1 earnings reporting season is on its way. In any event, S&P 500 forward earnings rose to another record high during late March, suggesting that Q1’s operating earnings will be good.
Source: Ed Yardeni Research
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