Rathbones’ Ed Smith comments ahead of the US Federal Reserve interest rate decision

Now that the latest round of China/US trade talks have come to an uninspiring end, attention will shift to this evening’s announcement from the US Federal Reserve and the expected 0.25% rate reduction in the real interest rate. Markets will also be searching for clues as to whether there will be any further rate cuts this year, or whether this is a one off insurance cut.

By 31 July 2019

Key points from Ed Smith, Head of Asset Allocation Research, at Rathbones:


  1. 0.25% interest rate cut likely. We would be very surprised if the Fed cuts by 0.5% - the latter is inconsistent with comments from the committee's most dovish members, and is inconsistent with the Fed's framework.
  2. Insurance cuts are real! A cut doesn't necessarily mean the Fed is correcting for a past mistake, or that a recession is coming.
  3. A ‘one and done’ is possible - growth and inflation data really are not that weak.
  4. There is a risk that markets could react poorly to that, given they currently expect three rate cuts over the next six months. But the Fed would only stop at one if economic momentum turns positive/stabilises or trade risks dissipate, in which case the elevated equity risk premium - the compensation investors demand for the risks to future earnings - would likely come down, offsetting the negative impact from interest rates.
  5. Equity markets have in the past responded well to an insurance cut. So too have cyclicals, with a two month lag. But we don't think investors should ditch a defensive bias just yet - we're late in the cycle, growth is still going to be decelerating on a year-on-year basis for a while yet, and there are continuing risks from the trade war, China, and Iran.
  6. Where the Fed goes will others follow? We expect the ECB to prime the pumps again, but expect the Bank of England to hold back until October at the earliest.


For further information, please get in touch:

Madhu Kalia
Intermediary PR (UK/Europe)
Rathbone Unit Trust Management
020 7399 0256
07825 596302
madhu.kalia@rathbones.com      Sam Emery
Quill PR
020 7466 5056