Lower U.S. Base Rates, Persistent Inflation and a Surprise

Good Morning Ladies and Gentlemen

”Scratch an altruist, and watch a hypocrite bleed.”

Michael Ghiselin

Lower U.S. Base Rates

The US Federal Reserve has reduced its key interest rate to a range of 3.50% to 3.75%. This decision comes in response to indications of weakness in the labour market. Following the 43-day government shutdown in October and November, essential official data regarding the labour market and inflation have not been available. Consequently, central bankers have had to rely more heavily than usual on estimates from private institutions and their own surveys.

Persistent Inflation and a Surprise

Federal Reserve Chairman Jerome Powell attributed the overshoot in inflation to tariffs. A notable surprise from the recent meeting was the announcement of plans to purchase short-term government bonds totalling USD 40 billion over the coming months. These purchases may extend over several months and represent a form of „mini QE“ that injects additional liquidity into the market and is likely to enhance investors‘ risk appetite.

What About the Yield Curve?

The yield curve is likely to steepen if short-term interest rates decline, provided that inflation remains stable. One thing is evident: the Federal Reserve can exert direct influence on the short end of the yield curve, while managing the long end is far more challenging. For mortgage borrowers and consumers relying on credit, the long end is crucial. Consequently, I do not anticipate a significant easing of interest rates, even if short-term rates may decline further following Wednesday’s reduction. Additionally, the U.S. president’s comments about the central bank and its governors are contributing to uncertainty among bond investors, which does not bode well for long-term interest rates.

And the Winner is?

Well, Ladies and Gentlemen, the banking sector will not complain. Because the banking sector primarily functions by capitalising on the difference between short-term borrowing rates and long-term lending rates. This structural dynamic benefits financial institutions, allowing them to profit by borrowing at lower rates while extending credit over longer maturities. Such practices not only enhance liquidity but also contribute to overall financial stability, provided interest rates do not rise significantly and swiftly.

What About Investors?

The market reaction exhibited a distinctly bullish sentiment. Traders are increasingly anticipating economic growth and a favourable environment for generating profits. The Federal Reserve’s unexpected provision of additional liquidity has typically engendered positive responses among investors, contributing to a climate of optimism.

Swiss National Bank

Key interest rates in Switzerland remain unchanged at 0.0%, as determined by the Swiss National Bank (SNB) during its monetary policy assessment on Thursday morning. This decision aligns with market expectations. In September, following six consecutive interest rate cuts, the SNB opted against further monetary easing and has maintained its key interest rate at 0% ever since. SNB President Martin Schlegel recently emphasised that the threshold for an interest rate cut below zero is high due to potential undesirable side effects.

Ladies and Gentlemen

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I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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Mail: smk@incrementum.li