Two Fed rate cuts are still possible in 2024: Strategist

Minneapolis Federal Reserve President Neel Kashkari has struck an optimistic tone regarding potential rate cuts, stating that one interest rate cut from the Fed in December is "reasonable." However, Wells Fargo Global Investment Strategist Veronica Willis joins the Morning Brief to discuss why two rate cuts in 2024 are still possible.

Willis highlights that between now and the end of the year, a slew of economic data points could give the Fed enough "confidence" to enact more than one cut. She notes that if progress on inflation persists, consumer spending moderates, and "the economy softens a little bit" as it approaches pre-pandemic levels, it could pave the way for the Fed to reduce rates twice.

Addressing the potential market reactions to a Fed rate cut, Willis told Yahoo Finance, "The markets really still felt positive about the prospect of any cuts at all, and I think that a lot of that's been priced in. So I don't see a lot more exuberance once the Fed starts to actually cut, but there is that potential for the market to remain strong."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video transcript

Minneapolis Fed Reserve President Neil Kashkari now saying it's reasonable to predict a December rate cut.

Kashkari telling CBS face the nation that the FED is in a good position to take its time and watch the data.

Joining us.

Now to discuss, we have Veronica Willis Wells Fargo Investment Institute, Global Investment strategist.

Thanks so much for being here.

So I I know that you still anticipate two cuts for this year.

Talk to me about what single piece of data you think the fed would have to see particularly for cash call in December to get moved up a bit to allocate enough time for two cuts.

I think it's not gonna be one single data point that the fed is looking at.

I think they are gonna be multiple data points between now and the end of the year that would uh give the fed more confidence to potentially do two rate cuts this year.

Instead of the one that they've got penciled in in their latest do plot, there's gonna be updates on inflation if we continue to see inflation moving in the right direction.

I think the feds gonna feel a little bit more confident that they'll be able to cut rates more than once this year.

Uh We've got retail sales out this week that I think is going to be really important.

If uh that trend of slowing consumer spending still holds, we're starting to see the economy soften a little bit but not too much.

We start to see inflation come down.

We start to see the labor market normalizing getting a little bit closer to those pre panem levels.

I think the fed will get a little bit more confident about um potentially doing two rate cuts this year.

Barnica when we talk about the prospect here of two rate cuts, what exactly is that going to look like here for equities?

Is that going to be the catalyst?

Do you think to really keep this momentum that we certainly have seen in the market alive?

I think, you know, once the fed starts to cut the market, I think has priced that in.

So we've seen a lot of exuberance in the market throughout this year as we've come down from, you know, six or seven rate cut expectations at the beginning of this year down to one or two.

The markets really still, you know, felt positive about, you know, the prospect of, you know, any cuts at all.

And I think that a lot of that's been priced in.

So I don't see a lot more exuberance once the fed starts to actually cut.

Um but there is the potential for the the market to still remain strong.

We're not expecting a major pullback or anything like that.

Yeah, we were just talking with our uh markets reporter Josh Schafer about this and he was mentioning that it's really about the A I trade.

I'm curious from your perspective, I know that you trimmed tech to neutral.

How do you maintain that perspective?

Given that tech is really driving this market even perhaps more than the FED is at this moment, I think, you know, it's key to remember that tech is a huge sector within if we're just thinking about the S and P 500 so even a neutral allocation, there is a significant waiting.

We're kind of cautioning our investors against getting over their skis in that tech exposure because we do believe that the, the A I play is a longer term theme that should be beneficial across multiple sectors.

So, you know, thinking in particular of kind of the infrastructure that's needed to maintain A I and as that is adopted broader across various industries, we think that that could actually be beneficial across more than just the tech sector.

And so we're wanting to kind of diversify our exposure there.

And I guess more specifically where what should investors be keeping in mind when, when, when they are trying to position themselves for that longer term A I play?

Is it utilities?

Is it energy?

Where should they be looking right now, we're favorable on energy industrials and um materials.

And those three sectors we think are, you know, positioned really well to benefit from the A I trade.

And the valuations are a lot more attractive than thinking about those more stretched valuations in the tech sector.