Monthly update: Rate cuts back on the table despite tariff pressure

The US Federal Reserve (Fed) is considering cutting interest rates due to slowing economic growth and a cooling labour market, despite tariffs likely pushing inflation higher over the next couple of quarters.

Speaking at the Fed’s annual Jackson Hole conference in August, the central bank’s chair Jerome Powell hinted at imminent interest rate cuts for the first time this year. He said that, while tariffs are causing increasing prices, there was a reasonable case that the tariff impact would be short lived and a one-time increase – allowing for potential rate cuts to support the economy.

In line with this view, many economists are expecting the Fed to lower interest rates in September, followed by a further rate cut towards the end of the year.

Fahad Kamal, Chief Investment Officer at Coutts, says: “It is our view still that we see rates coming down on both sides of the Atlantic. In the US, we would expect a slower pace of rate cuts than currently expected by the market in light of sticky inflation and the economy remaining in good health.”

Stock markets end August strong

Stock markets reacted positively to the news of the possible resumption of rate cuts starting September, with the S&P 500 finishing August at an all-time high. The recent rally was aided by another stellar US earnings season, beating analysts’ expectations.

Large US technology firms remained the stars of the show in the recent earnings season, driven by growing demand for artificial intelligence (AI).

For now, the earnings and economic impact of AI is largely through investment in the infrastructure required to facilitate its use. Over the long term though, it is the deployment of AI, in businesses from a wide range of sectors, that will drive earnings and economic growth. The path may not be straightforward, and there may be volatility in this theme along the way, but over the long-term we are bullish.

Fahad explains: “So far, the earnings benefits of AI have been relatively concentrated in a handful of large technology companies. Over the long term, however, deployment of AI across the economy will mean the impact is more widespread.”

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. 

Supported by strong corporate earnings and anticipated rate cuts, global equities remain an attractive opportunity in our view. We hold an overweight allocation in global equities, with particular emphasis on the US and Japan where earnings momentum remains especially strong.

The US dollar has weakened against a broad set of currencies for much of the year. This depreciation has reduced sterling-based returns from global equities, though our portfolios have offset part of the drag through targeted currency hedging.

We also hold exposure to a liquid alternatives strategy, which has delivered stronger returns than traditional government bonds over the past year. With equity and bond markets increasingly correlated, this allocation provides valuable diversification within our multi-asset portfolios.

As always, our approach remains guided by long-term fundamentals, active risk management and a commitment to delivering consistent value for our clients.