Fed signals rate cuts in 2024. Here’s what it means for your investments

What happened?

The US Federal Reserve (Fed) has kept its benchmark interest rate unchanged once again in its latest meeting.

More importantly, the Fed has indicated it is done with rate hikes. 

In fact, the Fed is now projecting three interest rate cuts in 2024. 

Stock investors cheered the potential rate cuts, with the S&P 500 closing at a year-to-date high of 4,707.

There was also a sharp fall in government bond yields following the Fed meeting, with the US 2-year government bond yield declining to 4.35% from 4.7% just at the start of the month. 

Here are our key takeaways from the Fed’s latest meeting, and what would mean for T-bills, fixed deposits, stocks and REITs. 

What we learnt from the latest Fed meeting

#1 – Fed pauses on rate hikes again

The Fed has kept its benchmark interest rate unchanged at 5.25% to 5.5% again.

This would mark the third time it has paused on its interest rate hikes since the September meeting.

In making this decision, the Fed noted that recent indicators suggest the growth of economic activity has slowed from its strong pace in the third quarter. 

In addition, tighter financial and credit conditions for both households and businesses are likely to weigh on economic activity, hiring and inflation.

Earlier, we saw that the US Consumer Price Index rose by 3.1% in November compared to the previous year, inline with market expectations.

Clearly, inflation has come off sharply from 6.4% in January. 

#2 – Fed is projecting three rate cuts in 2024

More importantly, Fed officials have projected that the Fed funds rate will fall to 4.6% by the end of next year.

This would mean that we may see 3 rate cuts in 2024, compared to the previous projection for 1 rate cut. 

In addition, Fed Chairman Jerome Powell added that Fed officials talked about the rate cuts during their meeting.

In particular, Powell noted that the Fed is focused on “not making that mistake” of holding high rates for too long. 

This came just a few weeks after Powell mentioned that it would be “premature” to speculate on the timing of rate cuts. 

#3 – Investors expecting more aggressive rate cuts

While Fed officials are projecting three rate cuts in 2024, investors are forecasting a more rapid pace of rate cuts.

According to the CME Fedwatch Tool as of 14 December, investors are largely expecting 6 rate cuts in 2024, bringing the Fed Funds rate to 3.75% to 4.00% by the end of next year.

Investors are expecting the first rate cut to come through in March 2024, where the probability of a rate cut is now close to 90%. 

Clearly, investor expectations on the rate cuts have changed very quickly in the past month alone.

As recent as on 13 November, investors have only ascribed a 10% probability to a rate cut in March. 

Just one day ago before the Fed meeting, the probability was at 40%. 

What would Beansprout do?

The key message from the latest Fed meeting is that interest rates will likely be cut in 2024. 

Against this backdrop, we would consider the following:

• Lock in elevated interest rates before they get cut
• Look for opportunities in REITs and stocks

#1 – Lock in interest rates before they get cut

We have seen lower interest rates for T-bills and Singapore Savings Bonds in recent weeks.

For example, the cut-off yield for the latest 6-month Singapore T-bill fell to 3.74% from 3.8% in the previous auction.

Likewise, the 10-year average return of the SSB has fallen to 3.07% from 3.4% in the previous issuance.

Based on current projections, the 10-year average return on the next SSB may fall further to 2.9%.

Thankfully, the best fixed deposit accounts and savings accounts are still offering elevated interested rates for the month of December. 

#2 – Look for opportunities in REITs and stocks 

With expectations that interest rates may start declining next year, Singapore REITs have rebounded strongly in recent weeks. 

As shown in the chart of the iEdge S-REIT index below, the basket of Singapore REITs has rebounded by more than 10% from their lows in October, but still remain below their price levels in September this year.

However, we will stay need to be prudent in selecting which REITs to hold, as the distributions of the REITs may continue to be impacted by elevated interest rates in the near term. You can use our REIT tool to compare REITs and find the best REIT for your portfolio.

If you would prefer to gain exposure to a diversified portfolio of REITs, you can learn more about how to choose the best REIT ETF. 

On the flip side, there are growing concerns that the returns of Singapore banks may be under pressure. Learn more about the prospects of DBS, UOB, or OCBC following their recent third quarter results.

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