Evolving Fed Expectations and Asset Allocation Implications

Key points:

  • The current macro backdrop is slightly atypical for an impending Federal Reserve (Fed) easing cycle—growth and labor markets remain strong, while inflation levels are elevated despite progress over the past year.
  • The policy backdrop is also notable as Federal Open Market Committee (FOMC) members broadly see current policy levels as restrictive.
  • In our opinion, the implications for multi-asset investors remain positive for equities. We believe reflationary macro conditions and a peak in the fed funds rate (our base case) are supportive regimes for risk-taking in portfolios.

Is this time different?

Expectations for a Fed easing cycle have evolved tremendously since the beginning of the year, when the market was pricing in approximately six rate cuts. When will it happen, or will it happen, and what does it mean for asset allocation?

To answer these questions, we start with examining the macro backdrop relative to other Fed easing cycles. The famous question that continually plagues investors bears repeating: “Is this time different?” Through a macro lens, things do appear slightly different—growth and labor are not weakening, and inflation levels remain slightly elevated relative to the previous 30 years despite significant progress since inflation’s peak in 2022 (Exhibit 1).