The Fed agrees with the market

For investors, the easing cycle is starting a little late. We should see two more interest rate cuts by the end of the year, each by 25 basis points.

The decision taken today by the Fed was in line with market expectations. The 50 basis point cut suggests the Fed is in agreement with the market that the easing cycle is starting a bit late. But it’s hard to fault it, given the stronger-than-expected first-quarter inflation prints and recent downward revisions to previously released labor market data. We should see two more interest rate cuts by year-end, each of 25 basis points, with the Fed’s policy rate moving closer to 3% by mid-2025.

With most developed market central banks cutting rates, global financing conditions will continue to ease in the coming months. This will allow several emerging market central banks to resume or extend the easing cycles they began before the Fed. Lower developed market risk-free rates will also reduce external borrowing costs for emerging market issuers, reducing rollover risks and improving debt sustainability. The easing cycle will provide incentives for asset allocators to increase risk in emerging markets, as the attractiveness of money market instruments and major developed market rates gradually diminishes.