Fed: First rate cut coming next week – Nordea Markets

According to Anders Svendsen, analyst at Nordea Markets, US Fed is likely to deliver the first rate cut of the easing cycle next week and they expect a 25bp cut and a slightly dovish message.

Key Quotes

“We expect the Fed to cut its key interest rates by 25bp at next week’s FOMC meeting, taking the Fed fund’s corridor to 2.00-2.25% with a mid-point of 2.125% and an IOER rate of 2.10%.”

“Around two-thirds of the Bloomberg consensus expects a 25bp rate cut, while around one-third expects unchanged rates and a few a 50bp rate cut. Markets price in around 30bp of cuts, or a 25bp cut plus one in four likelihood of a 50bp cut.”

“There is a lot of uncertainty as to the monetary policy signals that will follow a 25bp rate cut, though. How to deliver a slightly dovish message when markets expect more than you want to do? Powell could repeat that the Fed stands ready to act again if needed, If the Fed does not believe that to be enough, we see two additional options:: 1) balance-sheet normalisation could be slowed further or stopped altogether and 2) a “technical adjustment” of -5bp could be made to the IOER rate.”

“The Fed wouldn’t want to overdo the easing either as that would risk “confirming” fears of an upcoming US recession. Thus, we believe Fed will opt for unchanged medium-term policy signals: Generally positive on the economic outlook, but seeing huge risks in weaker growth abroad, trade war, slowing investment growth, weak inflation and Brexit, and standing ready to act should these risks materialise.”

“We stick to our forecast of four rate cuts in total over the next year with the next rate cut tentatively factored in for October.”