"To make the case for Fed cuts outside of a recession, the FOMC would have to conclude that policy is actually restrictive," argue TD Securities analysts and go on to explain:
"Given that most estimates of the neutral rate in the Fed’s dot plot are above current levels, Fed officials would have to reduce their estimates of r*. The distribution of longer-run dots have drifted modestly lower, but we see a fairly high hurdle for the median to fall below the current fund rate range. Indeed, a case can be made for a somewhat higher neutral rate — particularly if productivity improves."
"Recent increases in productivity growth create a complicated environment for considering the possibility of Fed rate cuts: inflation may be lower as a result, but the neutral policy rate (r* in real terms) should be higher."
"This observation contrasts with current market pricing, suggesting the market-implied likelihood of rate cuts this year may be over-estimated. Look for markets to reprice slowly if productivity gains continue, more quickly if inflation stabilizes or rises later this year. If inflation slows unexpectedly, however, a broader rethink of the neutral rate by Fed officials becomes more likely."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.