Fed – Focus back to inflation
The Federal Reserve turned hawkish at its December meeting. The Fed cut rates by 25 basis points as expected, but guided for only two more cuts into 2025, compared to an expectation of four in September. New projections were hawkish, and inflation is expected to go back at the 2% target only in 2027. With this meeting, the Fed effectively recognises monetary policy is in a new phase. In September, the focus was on growth and easing was the plan. Currently, the focus is back on inflation and there’s an easing bias, much more uncertainty on the next moves. The fresh start from the new administration adds to upside risks to inflation and cuts into 2025. We do see further cuts in US as relatively difficult and anticipate rates volatility to remain high into 2025.
Markets – Cautious into 2025
We see the first quarter of 2025 as reserving potential for volatility. The Fed has surprised markets on the hawkish side, and equity valuations and credit spreads are at historical highs / tights. Market positioning is long and part of the positivity on equity and credit markets was postulated on accommodating monetary policy. A further increase in rates or rates volatility won’t be taken positively by spreads, as a very high % of total returns now stems from rates. Dispersion in credit markets abound making opportunities plenty, but we enter next year with a cautious positioning on both equities and credit.
Algebris Investments’ Global Credit Team
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