As widely expected, the US Federal Reserve, Bank of England and European Central Bank all cut policy rates in Q4 2024.
A new administration, the debt ceiling reinstatement and evolving financial conditions are a focus in the US, while a repricing of expectations and challenging outlook are what we’re evaluating across the UK and Europe.
The market digested the Fed’s 100 basis points of rate cuts in 2024 without extreme volatility, though we expect potential interest rate volatility as markets navigate expectations in the US and abroad.
The Federal Open Market Committee left short-term interest rates unchanged in Q1 at the current federal funds rate range of 4.25%-4.50%. The Fed kept monetary policy on hold as the US economy continued to exhibit strong growth, a resilient labor market, and sticky inflation. These factors have allowed the Fed to take a patient approach and cautiously wait for further evidence of progress toward price stability before cutting rates again. The federal funds futures market is currently pricing in three rate cuts for 20251.
The beginning of the second Trump administration has ignited uncertainty surrounding policies that could perpetuate inflationary trends across the US economy. The four policy areas that could impact the economy and markets are: global trade, immigration, regulation, and fiscal policy. Powell has suggested that the tariff effect on inflation will be transitory in the base case and inflationary expectations will remain anchored to the economic data. Considering that economic growth is below the federal funds target range, monetary policy remains restrictive and allows the Federal Reserve (Fed) to keep rates unchanged if these variables cause inflation to get too hot.
On January 2, the debt ceiling suspension expired and currently the US government is operating under extraordinary measures. Additionally, on March 14, Congress averted a government shutdown by passing a year-long Stopgap Funding Bill (Continuing Resolution) to extend funding for the federal government through September 2025. The SEC also announced an extension to the compliance dates for the Treasury Clearing Mandate for repo transactions to June 30, 2027.
On March 5, US money market fund industry assets hit a record high of USD7.025 trillion2. Although the US Treasury yield curve has dis-inverted, elevated short-term yields have remained attractive to cash investors and have been a driving factor in the continued growth in money market fund assets. The Fed Reverse Repurchase Agreement daily volume average through the end of Q1 2025 was USD144 billion, however, the facility hit a volume of almost USD400 billion on March 31, 20253.
Laurie Brignac, Chief Investment Officer and Head of Invesco Global Liquidity, offers her short take on the latest Federal Open Market Committee meeting and what it may mean for liquidity investors looking ahead.
Lower interest rates may help push global growth higher in 2025, creating an attractive environment for risk assets.
Recent history has shown that protectionist measures can hurt short-term economic growth but may not create a long-term hurdle for markets.
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