You're listening to Strictly Business Podcast with Lindsay Williams.
The US Federal Reserve has cut interest rates by 25 basis points, a quarter of a
percent.
With me now, Philip Saunders, Director, Investment Institute at 91 in London.
It was widely expected, Philip, and it's been a gratifyingly sort of benign
reaction for most asset classes.
Yes, absolutely right, Lindsay.
It's very, very well telegraphed.
You know, there was some debate about whether or not they do 50.
That was, you know, basically there was no real justification for that.
So doing 25 basis points was pretty much what markets expected.
And so there's been relatively little reaction to that.
And they signaled that they're going to potentially cut another two times, take
rates down
75 basis points in total, probably by the end of the year or January.
So it's not really...
You know, that newsworthy, what is newsworthy, of course, is that if you look
at the forecasts,
the famous dot plots, they're all over the place.
So, you know, it was a unanimous verdict, apparently, 11 to 1, the one being Stephen
Mirren,
who's recently, he's Trump's appointee.
He was the Trump plant, wasn't he?
Interestingly, he was the only dissenter.
Why was that before you go on to the forecast being all over the place?
he's Right at the dovish end of expectations,
he believes that rates should be lower.
And if you look at his dot plots, basically they're the lowest of the entire
group.
And he believes that the impact of tariffs on inflation, which has been running at,
you know,
a sort of higher than comfortable level for some time now, you know,
it's running at around about core inflation running around about 3% in the
US.
So it's pretty unusual for the Fed to be cutting rates in those circumstances.
He believes that inflation is due to continue to fall, obviously,
and that he feels that the Fed's policy has been lagging that and the Fed have
been keeping interest rates
too high for too long.
OK, tell us about the forecast being all over the place.
Was that something to do with the Trump plant coming in or is it just a dissent
within the existing members?
So I think it's just there's a high degree of uncertainty about what they should
actually do.
And to be fair, it's, you know, we're still in this sort of post-COVID disrupted
world where,
you know, it's we're not looking at conventional cycles.
You know, some things appear to be late cycle, other things appear to be early
cycle.
And so, you know, economists Generally, there's not a particularly high degree of
agreement at the moment.
And that, in a way, is reflected in the individual members'
forecasts for both growth and inflation and interest rates, which, of course, they
publish.
If there's a bit of confusion amongst the Fed members, the FOMC members, Philip,
does it sort of reflect what's happening in the U.S.
economy?
In other words, a very sluggish jobs market, but quite feisty inflation.
given the economic circumstances.
Does that reflect in a broader opinion outside of the Fed?
Yeah, very much so.
And I think we've got these two particular schools of thought, what I call the
recessionists,
who believe that we're on the cusp of a recession and that actually the Fed should
be cutting much more
aggressively at the moment.
And this is a result, obviously, of tariffs and everything else.
And then you've got the other school of thought.
which is sort of the polar opposite of that, that effectively that the
unemployment stats or the employment stats are a
lagging indicator.
And actually, if anything, things are turning around and you're beginning to see
manufacturing,
which has been recession effectively for the last four years, beginning to improve.
Consumer spending is holding up and the labour market is sort of, you know, it's
obviously a lot weaker,
but the unemployment rate isn't sort of spiking up.
So they're sort of saying that...
Equity markets are right to be bulled up, whereas the former group are saying,
right, it's crazy.
Equity market participants have got this completely wrong.
And there's a significant risk of a drawdown.
No such problem, of course, at the Bank of England, who are going to be announcing
their decision a few hours after we finish this
podcast.
Philip, inflation rate in the United Kingdom, I think, is 3.8 percent.
Growth is virtually non-existent.
What do you think is going to happen?
Will they follow the Fed?
Not necessarily.
I think the Bank of England is an extremely difficult
position and inflation is really not at a level that would particularly justify, you
know,
cut in rates at this particular point in time.
And this really is sort of largely because inflation has been pushed up by government
policy.
And, you know, we've come from basically being below the European average over the
last couple of
years to being well above it
simply because of basically policy shifts that have tended to actually push
inflation up.
at this sort of sensitive time.
So the Bank of England have got a very difficult, and the Fed had a difficult
decision.
Bank of England had probably an even more difficult decision because, you know,
inflation,
at least you can make the arguments in the US that inflation is actually coming down.
You know, there are a lot of measures that are actually coming down.
Obviously, tariffs has pushed in the other direction.
The Fed is deeming it to be transitory, whereas in the UK,
what's been driving inflation is a bunch of different things.
So the inflation rate is too high in the UK, which means that it would probably be
unwise for the Bank of England to actually
reduce rates at this point.
What does this mean for the 91 strategy, given what happened last night in the
United States?
Steady as she goes?
Yeah, pretty much.
I mean, I think that, you know, we obviously are a broad church,
so people have different views across the investment team.
But I think, you know, in terms of portfolio positioning on the multi-asset
side at any rate,
We're in the sort of improving economic environment driven by, you know,
reducing interest rates internationally, weaker dollar, which has obviously helped
emerging markets significantly.
And we think that growth surprises heading into next year are probably going to be on
the side of strength, not weakness,
because of this supportive policy backdrop.
Philip, thank you very much for your time.
Philip Saunders is director of Investment Institute at 91 in London.
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