Weekly Buzz: ✂️ More rate cuts – this year and the next

Markets are pricing in nearly a 100% chance that the US Federal Reserve (Fed) will cut interest rates by 0.25 percentage points when it meets next week – a continuation of its ongoing rate-cut cycle. But there's a bigger story here, one that will carry into 2025.

Finding the sweet spot

After years of rate hikes to combat inflation, the Fed is entering a new phase. Two key factors are driving this shift: inflation is cooling (though it's still above the central bank’s 2% target), and the US job market is  slowing down.

While non-farm payrolls (our Simply Finance explains this term) climbed to 227,000 last month, beating estimates, the broader trend shows that hiring is slowing. Meanwhile, November's annual inflation rate came in at 2.7%, slightly up from October, but still well below the peaks we saw in 2022. Together, these signals suggest the Fed has room to gradually bring rates down.

Ultimately, the Fed’s looking for the "neutral rate" – that sweet spot where interest rates neither restrict nor stimulate the economy too much. Unlike previous cutting cycles that often started during economic stress, the Fed now has the luxury of lowering rates while the economy remains robust.

While the Fed charts its course toward this neutral rate, external factors could complicate the journey. The president-elect’s proposed measures, particularly on trade tariffs, might throw a wrench into the works. Higher tariffs tend to push prices up, which could reignite inflation pressures and force the Fed to reconsider its rate-cutting timeline.

What’s the takeaway here?

While rate cuts typically benefit both stocks and bonds, context matters. While a "soft landing" – where inflation cools without the economy taking a big hit – is panning out, the positive effects will depend on how fast the Fed moves. So while December's cut is almost certain, the Fed's path through 2025 isn't set in stone, and you can expect a more measured approach.

As rates fall, keeping cash will become less attractive: savings accounts and fixed deposit yields follow central bank rates. Now might be the time to consider putting your cash to work in a portfolio of assets to capture opportunities in the markets – something like our General Investing portfolios.

📰 In Other News: China’s price problem

While much of the world battles inflation, China is grappling with a very different problem: deflation. A three-year crisis in its property sector has dented household wealth and buying confidence, and that’s brought about less consumer spending, leaving prices stagnant since early 2023. Figures for November showed annual inflation in China declining to a five-month low of 0.2%, despite a raft of recent stimulus. 

Prolonged deflation can lead to a downward spiral. Consumers – anticipating further price drops – will tend to delay purchases. Businesses, in turn, will cut down on production and investment. And to top it off, falling prices generally lead to lower revenues for companies, which can hit wages and profits.

But China’s policymakers aren’t just sitting still. In addition to a plan for increasing government spending on the economy, the country’s central bank announced that it will be more willing to trim interest rates, and slash the amount of money that commercial banks are required to hold in their reserves. That’s two big steps aimed at getting consumers and businesses borrowing, investing, and spending again.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Non-farm payrolls

The term "non-farm payrolls" might sound odd, but it's actually quite straightforward: it's simply the total number of jobs added in the US, excluding farms. This monthly report leaves out the farming industry because it changes dramatically with the seasons, which would make the overall employment picture much more volatile. So when you read that "non-farm payrolls have increased by 200,000," that simply means the US economy added 200,000 new jobs that month – just don't count the farmers.