Infinity Asset Management chief investment officer Piers Bolger has cautioned that interest rate decisions by both the US Federal Reserve and Reserve Bank of Australia could have major implications for sharemarkets in coming months, depending on what approach is taken on monetary policy.
Speaking to Investor Daily, Bolger said the absence of rate cuts by the US Federal Reserve or the Reserve Bank of Australia would likely lead to a slower growth environment through its impact on consumers and broadly restrict both growth and defensive asset classes.
While the asset manager expects that both the Federal Reserve and RBA will announce further rate cuts in the current rate cycle, if these cuts fail to eventuate, this will have negative implications, he warned.
“I think that’s the biggest risk even though we’ve seen a repricing of the number of rate cuts both globally and domestically.”
The Federal Open Market Committee (FOMC) will announce its policy decision on US interest rates at 2pm Wednesday (Eastern time) and is largely expected to keep rates on hold.
T. Rowe Price chief US economist Blerina Uruci said the FOMC has seen one more payroll and inflation report since its June meeting.
“The data mix skews modestly toward stickier inflation for longer, but not enough to push the FOMC hawks to make an abrupt pivot at the July meeting,” Uruci said.
“I think that Powell and most in the FOMC would like the market to continue pricing close to two cuts for the rest of year to maintain optionality and to provide political cover from an increasingly antagonistic White House.”
Uruci said the doves within the committee, Fed governor Christopher Waller and Fed vice chair Michelle Bowman, could still argue that the tariff-related inflation is being offset by other components and call for interest rates to be cut.
“Looking to the rest of the year, the acceleration in inflation momentum is hard to ignore and a premature cut in rates when the inflation outlook is so finely balanced would not be judged lightly by history,” she said.
T. Rowe Price expects Jerome Powell will try to direct the committee towards holding out for the next cut for as long as possible.
“Combining this reasoning with my relatively upbeat outlook for the economy, I think that a cut in October is more likely than in September,” Uruci said.
Bolger said the RBA’s decision to keep rates on hold in its July meeting was a “missed opportunity” for the Reserve Bank.
The asset manager still believes a rate cut for August is likely, despite some of the comments by RBA governor Michele Bullock reflecting a slightly more hawkish stance.
“We feel that the job numbers reflect [the need for a cut] and while trimmed mean inflation is at the upper end of the RBA’s target range, broad based CPI is at the lower part of the RBA’s target range,” he said.
For global markets more broadly, Bolger warned that confidence in the Federal Reserve and its chair, Powell, will be vital.
“Powell’s tenure comes up in the second quarter of next year, I don’t think he’ll go early but the appointee of that will be really critical for market confidence and the independence of the Fed,” he said.
“Will the [appointee chair] be more hawkish and dovish in their assessment of the current market environment? If they’re leaning to a more dovish stance, then what does that mean if, say, inflation hasn’t come down?
“That will have big implications for markets over that period.”
