The CEO of one of the world's largest independent financial advisory and asset management organizations is warning that there's a legitimate risk of no US interest rate cuts by the Federal Reserve this year.
Nigel Green of deVere Group issued the caution as the Federal Reserve's primary inflation gauge, the core PCE (personal consumption expenditures) price index, rose to 2.7%, exceeding expectations of 2.6%. Core PCE inflation also reached 2.8%, surpassing the anticipated 2.6%.
"This data represents another blow for the Federal Reserve and its battle against inflation," comments the deVere CEO. "The latest reading from the Fed's preferred gauge, PCE, underscores how inflation remains hotter than previously expected, despite the high interest rates which are being used as a weapon to try and cool it."
Green continues: "With the US economy defying expectations by consistently remaining strong, with a strong labor market, rising PPI and CPI, and with today's PCE, among other recent data, we are now revising our rate cut forecast.
"We believe that the cautious US central bank officials will need several consecutive months of evidence showing inflation is really heading back to the 2% target before they pivot on monetary policy."
As a result, Green says there is a "considerable risk that they will not feel comfortable about cutting rates before 2025."
deVere Group had previously anticipated just one rate cut this year, which they felt would likely arrive in the third quarter. However, Green feels that "this PCE data will "give the Fed further cause to push back."
"But we believe waiting until 2025 increases the risk of the central bank of the world's largest economy making a considerable policy mistake – especially in terms of the stability of the labor market and the regional banking sector," he cautions.
Green stated that as as interest rates are expected to remain elevated for longer than previously anticipated, investors should reassess their portfolios to manage risks and capitalize on emerging opportunities.
"Firstly, investors should consider reallocating their portfolios to sectors that typically perform well in a rising interest rate environment," advises Green. "Sectors such as financials, industrials, and materials have outperformed during periods of higher interest rates."
On the other hand, he explains that sectors sensitive to interest rates, such as utilities, real estate, and consumer staples, may face challenges in a higher-for-longer interest rate environment. Diversification across different asset classes and sectors remains crucial for mitigating the impact of interest rate fluctuations on portfolios.
"With there being a real possibility of no rate cuts this year, investors might need to adjust their portfolios to adapt to the higher-for-longer environment to mitigate risk and to seize the opportunities,” Green concludes.