Central Banks Will Probably Cut Only Half as Much as They Hiked
After a combined 1,475 bps in increases, the U.S. Fed, ECB, and BOE are expected to reduce rates by only 575 bps by the end of next year.
The central banks for most major advanced economies are likely to take back less than half of the interest rate hikes they have rammed through over the past two years—an outlook reshaped significantly by the outperformance of the U.S. economy.
After the Federal Reserve, the European Central Bank (ECB), and Bank of England (BOE) jacked up their benchmarks by a collective 1,475 basis points (bps), only 575 bps of reductions are in store by the end of 2025, according to new Bloomberg Economics estimates.
The latest outlook, coming after a series of disappointingly high inflation readings in the United States, along with better-than-anticipated economic activity, is revamping the investment landscape. It offers more time to lock in today’s relatively high yields, plus opportunities for relative-value bets as some central banks ease before others.
The Bloomberg Economics macro-yield model suggested back in November that 10-year Treasuries would end this year at 4.1 percent. As of last Thursday, it was pointing to 4.4 percent—which would mark a modest drop from Friday’s 4.65 percent. To Ana Galvao, the Bloomberg economist who built the model, “downside surprises from the inflation releases at the end of 2023, followed by the upside surprises from February,” did the most to reshape the outlook.
Monetary policy pivots are always hard to time, but the havoc the pandemic caused and the unprecedented, massive dose of fiscal stimulus since spring 2020 have made things all the harder, said Anne Walsh, chief investment officer at Guggenheim Partners Investment Management.
“All the historical mile markers that existed in the past—for example, from the time the Fed starts hiking, it’s usually 18 to 24 months to when the recession starts—have been extended,” she said.
Fed Chair Jerome Powell and his colleagues’ mission to get inflation back to 2 percent has been complicated by fiscal deficits that continue to come in historically large, according to Walsh. She pointed out the anomaly of big deficits at a time of sub-4 percent unemployment rates.
Walsh said she’s very positive on investment-grade bonds, seeing underlying credit fundamentals as good and yields at about 5.5 percent to 6.5 percent as attractive.
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