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Speaker 1: The Fed Reserve surprised more than a few economists this

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Speaker 1: morning didn't that when it made a decisive cut to

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Speaker 1: the interest rates in the US. The zero point five

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Speaker 1: percent cut was the first cut since the depths of COVID.

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Speaker 1: After the meeting, FED Chair Jerome Powell was asked whether

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Speaker 1: the bigger cut was a sign that the US economy

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Speaker 1: was actually doing worse than expected.

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Speaker 2: We can go quicker if that's appropriate. We can go

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Speaker 2: slower if that's appropriate. We can pause if that's appropriate.

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Speaker 2: We don't think we're behind. We do not think were

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Speaker 2: We think this is timely. But I think you can

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Speaker 2: take this as a sign of our commitment not to

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Speaker 2: get behind.

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Speaker 1: Sam Dicky from Fisher Funds is with us. Now, Hey, Sam, Hey,

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Speaker 1: How surprised was the market by this?

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Speaker 3: There was an excellent economists answer by Jerome Power. Whether

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Speaker 3: that's we can go faster, we can go slower, or

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Speaker 3: we can do nothing. Yes, here we go a long

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Speaker 3: away to cut, and you're right. Fifty basis points or

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Speaker 3: half a percent of a decent start. But it was

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Speaker 3: quite well anticipated by the market. So as at yesterday

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Speaker 3: the market was pricing into interest rate curves about forty

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Speaker 3: two basis points or point four two of a percent.

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Speaker 3: So said another way, the market was pricing as yesterday

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Speaker 3: about an eighty five percent chance of this half a

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Speaker 3: percent cut.

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Speaker 1: Why has it taken them so long to finally get

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Speaker 1: to this point?

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Speaker 3: Yes, it has felt like a lifetime, especially given the

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Speaker 3: magnitude of and the aggressiveness of the hiking cycle we

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Speaker 3: saw before this, So sort of five hundred and twenty

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Speaker 3: five basis points the most aggressive rate hiking cycle in

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Speaker 3: forty years. And remember to your point here that the

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Speaker 3: FED paused its rate hiking cycle way back in July

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Speaker 3: twenty twenty three. But remember hither you and I have

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Speaker 3: talked about the nineteen seventies, which has burnt into every

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Speaker 3: central banker's brain. In fact, it's their worst nightmare. Recall

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Speaker 3: the FED that then declared victory on inflation early started

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Speaker 3: cutting rates prematurely, and flashing took off again. The FED

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Speaker 3: had to crush it with a dreadfully aggressive rate hike cycle,

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Speaker 3: a hiking interest rates at twenty percent, So any central

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Speaker 3: banker is reluctant to cut now until they have certain

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Speaker 3: inflation is tamed, and the fear is now fairly certain

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Speaker 3: of that. Given inflation has fallen all the way from

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Speaker 3: sort of nine percent and change to about two point

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Speaker 3: five percent, which is fairly close to their two percent target.

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Speaker 1: And so what happened to the bond in stock markets

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Speaker 1: when this was happening, just like immediately before and afterwards.

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Speaker 3: Yeah, in the US market hours, so that closes about

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Speaker 3: eight eight thirty our time, was a bit of a

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Speaker 3: damp squib. Really, So if we look at short dated bonds,

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Speaker 3: which are the best way I have to look at

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Speaker 3: because they're most influenced by these sort of federal Reserve

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Speaker 3: rate moves to So the US two year government bond,

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Speaker 3: for example, it closed basically flat on where it was

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Speaker 3: before the announcement. In the US equity market actually closed

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Speaker 3: slightly lower, so you can see the rate cut was

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Speaker 3: pretty well priced, pretty well anticipated by the market. However,

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Speaker 3: since the US closed, Asian and Australasian equity markets are

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Speaker 3: sort of cheering a bit more and they're sort of

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Speaker 3: up one to two percent since.

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Speaker 1: Then, Sam, do you have any opinion on whether this

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Speaker 1: is going to impact what our Reserve Bank governor does?

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Speaker 3: I think, Look, I think Adrian's and as ough Man,

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Speaker 3: but I do think that when the most important central

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Speaker 3: bank in the world is cutting rates at double time.

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Speaker 3: Usually we move in twenty five basis point moves, albeit

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Speaker 3: the last few years has been abnormal, and that we're

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Speaker 3: moving in fifty basis point moves. Yeah, I think it

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Speaker 3: does give you a It puts some wind at you're

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Speaker 3: back and gives you some confidence to cut rates more aggressively.

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Speaker 1: Okay, what do investors need to think about when they

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Speaker 1: considering all of the stuff.

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Speaker 3: We're on a journey. Now. It's good. We've all been

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Speaker 3: waiting for this for a long time. It was a

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Speaker 3: torrid rate hike cycle that drove you know, the worst

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Speaker 3: bond market return in one hundred and fifty years and

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Speaker 3: twenty twenty two, and bond investors had a fairly tempered

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Speaker 3: year last year as well. So if this rate cutting

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Speaker 3: cycle continues to pace, the stronger returns for bond investors

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Speaker 3: that we've started to see this year should continue. So

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Speaker 3: that's that's good news. And remember, as a simple equity guy,

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Speaker 3: I always remind myself interest rates go down, bond prices

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Speaker 3: go up. So that's good stuff from a consumer and

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Speaker 3: equity market investors perspective. The interest rate relief is appreciated,

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Speaker 3: but we need to be careful what we wish for

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Speaker 3: we here, So if the FED really does start putting

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Speaker 3: the accelerated down and cutting faster than we expect, you've

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Speaker 3: got to try and figure out what that means. That

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Speaker 3: means the underlying economy is growing weaker and expected, and

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Speaker 3: that's likely to hit corporate profit. So ideally we want

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Speaker 3: a gentle rate cutting cycle driven by a gently slowing

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Speaker 3: economy rather than a panic rate cutting cycle.

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Speaker 1: Yeah, absolutely, Sam, thank you very much, as always appreciated that.

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Speaker 1: Sam Dickie Official funds at eighteen Away from seven.

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