What Happened?
The widely watched June FOMC meeting concluded on Wednesday, 12 June. Again, the Fed kept its benchmark interest rates unchanged at 5.25% to 5.5%. The Fed officials signalled just one interest rate cut this year and projected another four cuts in 2025.
Despite keeping the rates unchanged, the Fed made subtle changes in its post-meeting statement. The central bank noted that the economy is making “modest further progress toward the committee’s 2% inflation objective”. In contrast, its previous statement highlighted a “lack” of further progress. This shift in language suggests a cautiously optimistic outlook from the Fed regarding the inflation trajectory.
The Immediate Market Reactions
Both equities and bonds reacted positively to the FOMC announcements and soft inflation data. The S&P 500 Index staged a strong rally and hit a fresh high of above 5,400. Meanwhile, Treasury yields have declined, with the US 10-Year Treasury yield pulling back to 4.3%.
S&P 500 Index
US 10-Year Treasury Yield
What does this mean?
For markets: Disinflation continues
The path of the Fed’s future rate trajectory is largely data-dependent. What we find encouraging is that the latest data points continue to show that the disinflation trend is on track.
For instance, the US Core CPI in May, which excludes volatile food and energy prices, came in at 3.4% year-on-year, the lowest since April 2021. This could mean that even though the Fed adopts a more patient stance now, the direction of interest rates is still expected to be lower, which historically supports asset prices.
For your portfolio: Time to shift from cash to investments
Many investors are waiting for the Fed to start cutting interest rates before shifting their allocation from cash to other investments. This may result in missed opportunities, as assets tend to react before the actual rate cut takes place.
Bond prices are now at attractive levels, as bond yields are near 15-year highs. Investors now have the opportunity to lock in today’s attractive yield levels and potentially price appreciation from potential future rate cuts. S-REITs present a similar set of potential benefits, with the price-to-book ratio currently trading 20% below its longer-term average.
Potential rate cuts can bode well for equities too, as lower rates can translate to reduced borrowing costs and increased earnings. To capture upside potential while managing concentration risk, diversification is key. As the valuations of some of the mega tech names are on the expensive end, we recommend investing in diversified equity portfolios, such as Syfe Core Equity100. This will help avoid overexposure to any particular group of stocks.
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