Tim Hext: What the US rate cut means for investors – and what’s next

Now that the US rate-cut cycle has begun, the Fed’s focus turns from inflation to employment. Head of government bond strategies TIM HEXT explains what this means

• Rate-cutting cycle has begun
• Near term, the market is still ahead of the Fed itself
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE US Federal Reserve cut 50 basis points overnight to 5 per cent, ending the 25bp-or-50bp debate of the past month.

You might have expected the bigger cut to help bond and equity markets, but both moved slightly the other way.

Yields were around 5 bps higher and equity markets around 0.5 per cent weaker.

This response is more to do with the optimism already priced in versus the Fed estimates for future rates – known as the “dots”.

The Fed’s closely followed “dot plot” visually represents the rate expectations of individual Federal Reserve officials.

Every quarter these 18 officials publish their economic projections across a number of economic indicators.

Each September they extend out to three years – so we now have our first look at these projections for 2027. 

They also provide an estimate of the long-term neutral rate of interest.

Here are the 18 dots for each year as per the latest information from the Fed (PDF). I have added the market estimate based off current pricing (in red).

As you can see, near term the market is still ahead of the Fed itself.

So, while the actions overnight could be seen as bullish for markets, the dots were also a reminder that speed and final destination matters.

The impact of hosing down expectations outweighed the larger actual cut.

Now, Fed officials are always at pains to say these are just estimates and not some preset path.

As always, it will react to incoming data.

With two meetings between now and the end of the year, the Fed estimate of only 50bp in further cuts may prove too low. Time will tell.

In the big picture though, a rate-cut cycle has begun.

The Fed is now more focused on employment than inflation, so payroll data will be front and centre.

We expect a day or two of slightly higher yields as some positions are cleaned out.

But any move back to 4 per cent or higher on Australian 10-year yields should be seen as an opportunity to add duration.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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