Michael M. Santiago
Investors will be looking at upcoming data for clues on how the Federal Reserve will move on interest rates in two weeks as well as its two meetings following November’s election, Wells Fargo Investment Institute (WFII) Senior Global Market Strategist Scott Wren said in a Thursday note.
For the Federal Open Market Committee’s (FOMC) meeting in two weeks, Friday’s jobs report for August and next week’s consumer price index reading are expected to be keys in the panel’s decision-making, Wren said.
After one of its most aggressive monetary policy tightening campaigns following the COVID-19 pandemic, the Fed is now widely expected to cut interest rates as its dual mandate has come into better balance.
WFII's Wren thinks the financial media is spending too much time on whether the FOMC will cut its benchmark lending rate by 25 or 50 basis points later this month.
“While we are in the 50 [basis point] came, we do not think investors should get hung up on the magnitude of the first cut,” Wren said. “The more important point to focus on is that the Fed is ready to cut rates, likely by a meaningful amount over the balance of this year and in 2025.”
He said he’s looking for 100 basis points of cuts over the rest of this year and 75 basis points of cuts in 2025. “That would take the federal funds target rate of down close to what we would consider to be the ‘neutral rate,’” Wren said. “The neutral rate, theoretically, is the interest-rate level that neither stimulates nor creates headwinds for the economy.”
Wren said WFII had adjusted its portfolio ahead of the beginning of the central bank’s rate-cutting cycle, “which we believe will lead to an improved economy as we move through next year.”
After a “robust” bond rally and "a correction in stocks,” WFII reallocated into large-cap equities from short-term fixed income, he said.
"In addition, a portion of the reallocation went toward bringing our small-cap domestic equity weighting up to a neutral (in line with strategic long-term allocations) after nearly two years of being underweight. While we are sticking with our quality preference for now, small caps are typically beneficiaries of a rate-cutting cycle," the strategist added.
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