The Federal Reserve is unlikely to cut interest rates in the foreseeable future as inflation remains stubbornly above the central bank's 2% target, according to deVere Group, one of the world's leading independent financial advisory and asset management organisations.
The core Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge, rose 2.8% year-over-year in December, while the headline rate climbed 2.6%. These figures were in line with expectations, but they reinforce a concerning reality: the disinflationary momentum that markets were banking on has stalled.
"The data is clear: inflation is proving stickier than many had hoped," says Nigel Green, CEO of deVere Group.
"This should pour cold water on the idea of imminent rate cuts. The Fed will be extremely cautious about loosening monetary policy too soon, especially after spending years trying to regain control of inflation."
The fresh inflation figures bolster the case for the Federal Reserve's latest decision to hold off on rate cuts.
At the January meeting, policymakers acknowledged that price pressures were easing from the post-pandemic peaks but also signalled that they are not yet comfortable enough to begin lowering borrowing costs.
Markets have been aggressively pricing in multiple rate cuts in 2024, with some investors even expecting an initial move as early as March.
However, deVere Group has long maintained that such expectations are premature.
"The Fed is not in a rush," the deVere CEO continues.
"They're acutely aware that cutting rates too soon risks reigniting inflation, which could undo all the progress made so far. The central bank will need much more convincing evidence that inflation is on a sustained downward trajectory before acting."
The prospect of prolonged higher interest rates has significant implications for investors. With borrowing costs set to remain elevated, growth stocks, particularly in the tech sector, may face headwinds.
However, the CEO remains bullish on specific opportunities: "Markets have been far too complacent about rate cut expectations, but this creates openings for savvy investors.
"We see value in quality equities with strong earnings potential and defensive positioning. Investors should also be looking at global diversification strategies to hedge against potential US dollar strength."
As inflation remains above target and the Fed is unlikely to budge on rates anytime soon, deVere Group urges investors to reassess their portfolios accordingly.
"The bottom line is that rates are likely staying higher for longer than many anticipated," concludes Nigel Green.
"Investors should prepare for this reality rather than bet on a central bank pivot that simply doesn't seem to be coming yet."
