Global Asset Owners See Positive Signs from the Federal Reserve
Posted on 12/14/2023
Despite some manipulation in changing economic definitions, many economists believe that price growth peaked in 2022 in the United States. Assuming deity-like powers, there are talks that central bankers are wishing to contain inflation and move it down to their 2% targets in dreams of a “soft landing”. Oil-rich sovereign wealth funds, such as the Abu Dhabi Investment Authority and the Qatar Investment Authority, have continued to allocate as if the U.S. economy was chugging along. All of this makes sense, as U.S. listed corporations such as Salesforce, Etsy, in some instances have tightened their workforce belts by laying off workers to increase profits. Certain sectors remain at risk for these institutional investors, such as office real estate.
On December 13, 2023, the Federal Reserve under Jerome H. (Jay) Powell agreed to hold interest rates at the 5.25% to 5.5% range. The U.S. central bank has raised interest rates 11 times since March 2022 in an attempt to contain rampant inflation. Federal Reserve officials expects inflation to cool in 2024 at a faster pace than anticipated. Powell did reiterate that additional rate hikes are on the table. This is while Wall Street rages and stocks continue to rebound in 2023, as many equity investors expect rate cuts in 2024 – specifically three quarter-point cuts. The Dow Jones Industrial Average hit a high of 37,282 on December 14. 2023. Wall Street believes the first interest rate cut would come in March 2024. The Fed’s post-meeting statement highlighted that “inflation has eased over the past year but remains elevated,” which is a change. The usual sentence in the past was that “inflation remains elevated.” In addition, the U.S. is going into a presidential election year, which exerts additional pressure on politically-appointed board members of the Federal Reserve. While economists have intense focus on the U.S. unemployment rate, the real debate should be on U.S. labor wages, as real inflation has gobbled up citizen’s ability to save. The following day, the Bank of England decided to hold interest rates as well at 5.25%, which is a 15-year high. Furthermore, the European Central Bank (ECB) left its three key rates at 4%.
Historically speaking in the Western world there are two ways countries get out of debt. They can default/forgive debts or inflate their way out of debt, which impacts the individual saver. Inflation is easier as it kicks the can down the road. As the U.S. government’s debt deficit widens, the cost of that debt with higher interest rates exerts pressure on the country. Central bankers understand that if they can keep interest rates below the rate of inflation, then the governments can move funds from the private sector to themselves as form of debt reduction.
All in all, there are clear signs the Federal Reserve will let off its rising of interest rates in a bid to guide the U.S. economy toward a soft landing. Global sovereign wealth funds and public pension investors appear to have made adjustments in keeping cash, ready to deploy when the signal is clearer.
Keywords: Federal Reserve System.
