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Fed hits the pause button on rates

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

In the final rate-setting meeting of the year, the Federal Reserve has left rates on hold. Members of the central bank’s policy committee unanimously agreed that keeping rates at the current level was the best move for the economy.

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Speaking at the press conference yesterday, Fed Chairman Jerome Powell said the US economy is now “in a good place” and the recent cuts had “kept the outlook on track”, protecting the world’s largest economy against slowing global growth and trade tensions.

At the start of this year, fears of a global recession, triggered by the Chinese slowdown and an escalating trade crisis, meant markets were expecting four rate hikes over the course of 2019.

However, the opposite happened. In the summer the Fed adjusted its policy and cut rates at three consecutive Fed meetings between July and September.

It appears this has had the desired effect as rate cuts have re-stimulated the housing market, with consumer confidence remaining resilient and the US experiencing the strongest labour market for 50 years. There are also early signs of a stabilisation in manufacturing.

Rate cuts weaken the US dollar, making US exports cheaper to overseas buyers, as well as boosting US households, as borrowing becomes more affordable. For an economy so dependent on its consumers, it’s easy to see why markets have welcomed the cuts as it makes US households feel a little bit richer.

Eyeing a re-election next year, President Trump is also very aware of this and has been putting pressure on the Fed to cut rates to boost the US economy.

The key question for investors is whether US markets can continue their upward path next year or if we are now in the final throes of the bull market, when gains can be strong but risks rise.

US investment banks are broadly positive on the outlook for the year ahead, predicting the rally will continue thanks to an accommodative Fed and robust domestic economy.

The average price target for the S&P 500 in 2020, based on forecasts from eight major banks is 3,278, which would be an increase of around 5% from the current level.

For those who are positive on the US, our Select 50 list has five funds recommended for the region, such as the JPM US Select Fund whose top five holdings include Microsoft, Google-owner Alphabet, Amazon, Mastercard and Coca-Cola.

Alternatively, a global fund such as the Rathbone Global Opportunities Fund is another way of accessing the US as the fund is currently overweight the US. The only non-US company in its top ten holdings is Chinese internet company Tencent.

James Thomson, manager of the Rathbones fund features in our latest MoneyTalk 2020 Foresight video, where he explained why he remains bullish on the prospect for US markets.

“Everyone keeps telling me the US won’t outperform this year and yet it does, year after year”, he said. “I think US equities will do it again. Despite the ugly politics, the US will make us money because that’s where the growth is. US companies are growing profits four times faster than the rest of the developed world. That’s been true for the last 15 years. Some advantages are permanent. There are simply some world beating, innovative, resilient rock star companies that the rest of the world doesn’t have, and probably never will.”

Ayesha Akbar, manager of the Fidelity Select 50 Balanced Fund, also features on our 2020 Foresight video. She takes a different view to James Thomson and is more positive on the outlook for emerging markets such as China, than the world’s more developed markets such as the US.

Meanwhile, closer to home, Merian’s Richard Buxton believes the UK should not be overlooked and is optimistic on the prospects for the domestic economy in the year ahead.

The three experts give their views in the video below.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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