In a recent note, Macquarie analysts explored the volatile landscape of interest rate expectations and its implications for equity investors amid the market volatility.
The firm emphasize that the Federal Reserve's shifting stance on monetary policy has created significant uncertainty in the market.
"In late '23, the consensus agreed that by Dec '25, the Fed's policy rate will be ~3-3.5%, at least 150bps lower than expectations six months prior," Macquarie notes.
However, Macquarie notes that the Fed's position has oscillated dramatically, leading to confusion among economists and investors.
The analysts observe that just three months after the Fed seemed to satisfy its inflationary mandate, it turned hawkish again, prompting economists to suggest potential tightening.
"Since then, it took just three positive inflationary prints and some signs of a slowdown," leading to renewed expectations for rate cuts in 2024.
This rapid shift from dovish to hawkish and back again underscores the heightened unpredictability of neutral (r*) rates.
Macquarie stresses the importance of focusing on long-term trends rather than reacting to short-term noise. Despite the recent volatility, they argue that there is no evidence of a systemic change in r*.
They maintain that as nominal GDP slows, policy rates will fall towards 3%. Their thesis is supported by three pillars: the transitory nature of inflation spikes, the irrelevance of traditional predictors like the Sahm rule, and a world of abundance rather than scarcity.
Macquarie concludes that while central banks will remain backward-looking due to a lack of confidence in their models, long-term equity investors can largely ignore the noise.
The analysts foresee a backdrop of constrained growth, disinflation, lower rates, and increased liquidity. "What is there not to like?" they ask, suggesting that despite the market's current turbulence, the long-term outlook for equities remains positive.