Anthony Willis, Columbia Threadneedle Investments
1. The US Federal Reserve (Fed) has resumed cutting rates, while other developed markets are taking a more cautious path. How is this policy divergence reshaping the investment landscape?
We are at a stage where monetary policy across developed markets is not synchronised. However, other developed market central banks are arguably not ‘cautious' as such, but are reacting to their own economic situations, which differ from the US. And although the Fed is set to cut rates further over the next six to nine months, the Fed chair, Jay Powell, has repeatedly made it clear that this policy is not on a pre-determined path.
Elsewhere, if inflation in the UK has indeed peaked and is rolling over, the Bank of England should have scope to cut rates two to three times. However, rates in the eurozone are likely on hold given inflation is already back at target. Meanwhile, the direction of travel for rates in Japan is higher, albeit very gradually. This lack of synchronised policy will likely create opportunities over time, not least if we see rates normalise in Japan and an end to the carry trade.
2. What are the risks and opportunities for investors given this backdrop?
Investors need to be careful what they wish for with regard to US rates, having priced in a level of rate cuts that we have previously only seen as the country has gone into recession. The probability of a US recession remains relatively low for now. However, there are risks of a stagflationary environment emerging should tariffs push inflation higher while the labour market – and wider economy – cool down. A backdrop where we see two or three more US rate cuts and a ‘soft landing' would be very supportive for risk assets if history is a guide.
3. What's your view on the US dollar given the rate trajectory relative to other central banks?
We have seen a notable softening of the US dollar in the first half of 2025 as the US ‘exceptionalism' theme has increasingly been questioned. We think the path of least resistance for the dollar is somewhat lower from here, but we have likely already seen the significant moves. If risk appetite wanes, the dollar will take on its usual ‘safe haven' role and some of this year's moves lower could easily reverse.
4. What's your equity/fixed income allocation strategy given the expectation of further rate cuts? Are you extending duration in bonds?
Our current asset allocation is slightly constructive on risk assets, favouring equities over bonds. We are not extending duration in bonds given we see equities as a more compelling risk reward in the event of further rate cuts.
5. Powell is managing expectations around 2026 cuts, are you bullish on equities? How much of current equity valuations depend on continued rate cuts beyond 2025?
Powell is indeed managing expectations, but by the middle of next year the Fed board may look very different, with the chair and at least one other member being new Trump appointees. Equities have priced in further rate cuts over 2026, but the mood may change once we learn of the new makeup of the Fed board. The ‘new' Fed is likely to lean more dovish, which would certainly be a tailwind for equities. However, as 2026 evolves the wider economic backdrop and the need for the AI theme to move beyond capex towards monetisation are likely to be equally important themes.
6. To what extent is Fed independence at risk and what could this mean for markets?
There is certainly a perception that the Fed is at risk from the rhetoric from the White House, with intense pressure to cut rates. However, it is worth remembering that despite Trump's legal attempts to oust incumbent Fed members, Fed members and governors serve very long terms. So, even if new members – including a chair – join over the coming months, other board members will likely stick to long-held principles of independence. If a view develops that Fed policy is being led by the White House, then we will see further questions over US exceptionalism and likely resulting weakness in the US dollar and Treasuries.
7. How should investors consider positioning for the year ahead. What are some of the major headline events to watch for? Midterm elections?
The 2026 calendar is somewhat bereft of known political events. although the US mid-term elections and the presidential election in Brazil are ‘known' events. The US mid-terms will clearly impact financial market sentiment, and Trump will be very keen for the US economy to remain in solid shape and unemployment holding steady in order for Republicans to maintain control of Congress. Presidential approval ratings as they stand today suggest that Democrats will take control of at least one part of Congress, which means the final two years of the Trump presidency will likely see significantly more congressional oversight than we are currently seeing.
8. Is this an environment that rewards active managers and how are you uniquely positioned to evaluate these changes?
Given the run up in some parts of the market this year, and the increasingly narrow market leadership, there is scope for active managers to perform well – if they are able to identify the winners and losers in themes such as AI and higher defence spending. Our manager research process aims to identify such managers, and we use our proprietary scoring system to highlight managers we expect to thrive in an environment where stock picking is rewarded.
Read more on Multi Asset Investing for macro uncertainty in this new Focus guide in association with Columbia Threadneedle Investments, by completing the form below
