Investment Comment
8th December 2023
Votes that matter in 2024
Aside from the US presidential election (and elections to the Senate and Congress in the US) and a potential general election in the UK (albeit one doesn’t have to be held until 2025), the annual change of voters at the Federal Reserve matters for investors. Like a jury, 12 good men (and women) and true, the voting members of the Federal Reserve interest rate setting group (Federal Open Market Committee, FOMC) decide the fate on interest rates, and if not quite the lives of the accused, certainly the fates of investors do often depend on their judgement.
The voting membership of the interest rate decision making committee changes each year. Each voter has a slightly different slant on what the appropriate interest rate policy should be. So as the voting membership changes, the committee's overall policy tone evolves, and this shift does appear to impact decision making.
Federal Open Market Committee (FOMC) voting membership changes each year, so the policy shift reflects the voting membership as well as the underlying economic backdrop
Source: Artorius, Bloomberg
* Each governor or regional Reserve Bank president receives a ‘Hawkish/Dovish’ ranking along a spectrum spanning -2 (resolute dove) to +2 (resolute hawk) based on his or her policy inclination. The rankings are the subjective assessment of Bloomberg’s economists, based solely on public statements, and they are updated on an ad hoc basis. Recent comments are rated more heavily.
In 2021, the voting membership was distinctly tilted towards those members that believed that interest rates needed to be kept low - the doves, and interest rates were held at record levels all the way through 2021, which with the benefit of hindsight does appear to have been a policy mistake as inflation pressures accelerated with the injection of fiscal support. In 2022, the balance of voting power was most definitely in the grasp of those that thought interest rates should increase - the hawks. In the face of rising inflation, interest rates rose by 4.25% between March and December 2022.
In 2023, the hawkish 2022 committee membership changed to those with more dovish views on the need for policy tightening. Interest rates have ‘only’ been increased by an additional 1%, albeit against a backdrop of falling inflation despite resilient economic growth.
Interest rate increases in 2022 lagged the inflation rise of 2021. Markets are discounting much lower interest rates in 2024 despite quite a modest fall in inflation over the coming 12 months
Source: Artorius, Bloomberg
What of 2024? If the voting membership becomes more hawkish they maybe so inclined to hold interest rates higher for longer even as inflation falls back towards 2%. Markets appear to be discounting interest rates heading back to 4% by the end of 2024, which may be consistent with the tone of policymakers who were in the decision seat in 2023, but not quite so in line with the decision makers for 2024. Economists expect that the core inflation rate in the US will be 2.5% in 2024, down from the 4% it has averaged in 2023, but still higher than the 2% target that the Federal Reserve has set.
If interest rates are held higher for longer, then economic growth may continue to be sluggish and the recent rally in the equity market may falter.
The return of the Trump in 2024?
A few notes on the return of Trump (a phrase that conjures up the Return of Empire and the negative storyline in that Star Wars sequel). Can Trump stand if convicted of a crime? Yes, almost definitely. Bizarrely, even if convicted of the most serious crimes that he has been accused, including insurrection, constitutionally it seems that Trump would be able to stand. But the irony is, that as a citizen of Florida he would be unable to vote, as felons are unable to vote until completing their full sentence and paying all fines and fees.
A Trump presidency is likely to heighten risk aversion for investors given the geo-political challenges from Ukraine to China, and global issues such a climate change that seem to beyond the grasp of Trump to address. Votes matter.
Gerard Lane Chief Investment Officer
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All expressions of opinion reflect the judgment of Artorius at 8th December 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
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