The Fed pivots: Lower rates, higher stakes

October 2024

An analysis of previous rate-cutting cycles and macroeconomic conditions suggests a wide range of potential asset class outcomes in a hard or soft landing.

Originally published by our U.S. partners.

Fulcrum Issues is an ongoing series featuring commentary from Fidelity’s Target Date investment team. In this series, Fidelity portfolio managers and researchers share insights on current topics of critical importance for multi-asset class investors.

Highlights

Recent trends in inflation, employment, and gross domestic product (GDP) growth support a non-recessionary (soft landing) outcome.
Forward interest rate curves suggest that investors are expecting rate cuts to be larger than rate cuts in historical non-recessionary environments.
Equities have outperformed fixed income after the first non-recessionary cut, led by non-U.S. developed markets.
Fixed income (as measured by the Bloomberg U.S. Aggregate Bond Index) had positive returns in non-recessionary and recessionary rate cuts and outperformed equities when the recession odds approached 60%.
Commodities have lagged following both recessionary and non-recessionary cuts.

Investors are tasked with developing techniques to frame and weigh the range of potential outcomes that could affect asset prices. As we observe a shift in monetary policy, with the U.S. Federal Reserve expected to cut rates by almost 2% in the next 22 months, we are motivated to study historical precedents for rate cuts and the range of potential outcomes for asset returns. We note that the magnitude of rate cuts that investors are expecting suggests debate about whether the Fed is managing a soft landing or is acting in response to an adverse growth scenario. The uncertainty created by a “hard versus soft landing” rate-cut scenario makes it a fulcrum issue for investors.

To address this issue, we studied previous rate-cutting cycles during non-recessionary (soft landing) and recessionary (hard landing) periods and the potential implications for asset prices. We also considered the macroeconomic conditions leading up to prior rate cuts to evaluate the potential for a hard or soft landing.

The results of this study are largely consistent with our portfolios’ positioning and where we find relative value today. Our target date fund portfolios are overweight equities with a preference for international markets. We have reduced the portfolios’ commodity exposure in favor of fixed income while maintaining duration exposure that is similar to benchmark.

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Authors

Andrew Dierdorf

Portfolio co-manager

Andrew Dierdorf is a portfolio manager in the Global Asset Allocation group at Fidelity Investments. In this role, he is responsible for co-managing Fidelity’s U.S. and Canadian target date portfolios.

Before joining Fidelity in 2004, Andrew worked as an actuary at CIGNA and held actuarial roles at Provident Mutual Life Insurance Company. He has been in the financial services industry since 1993.

Brett Sumsion

Portfolio co-manager

Brett Sumsion is a portfolio manager in the Global Asset Allocation group at Fidelity Investments. In this role, he is responsible for co-managing Fidelity’s U.S. and Canadian target date portfolios.

Before joining Fidelity in 2014, Mr. Sumsion held various positions at DuPont Capital Management, Inc., including that of managing director of asset allocation and portfolio manager. Previously, Mr. Sumsion worked at Strategis Financial Group, Inc., where he was chief executive officer and vice-president of asset allocation research. He has been in the investments industry since 2001.

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