Fed: Hiking cycle is over? - Rabobank

According to analysts at Rabobank, the escalation of the US-China trade war and the resulting turmoil in financial markets has finally opened the Fed’s eyes that the hiking cycle is over and that the next move should be a rate cut.

Key Quotes

“Recent comments by Fed speakers show that they are thinking about the possibility of an insurance cut in the target range for the federal funds rate before the end of the year.”

“While the continued inflation undershoot is mentioned as one of the two reasons for an insurance cut, the main reason is the recent escalation in the trade wars and its impact on markets.”

“However, we think that an insurance cut will prove to be insufficient. More likely, the threat of a recession will force the Fed to start a full-blown cutting cycle in 2020.”

“Our recession probability model, based on the yield curve, now indicates an 83% probability of a recession by October 2020.”

“While we stick to our forecast of a full-blown cutting cycle starting in 2020, the risk of an insurance cut in 2019 has risen significantly. The likelihood and timing will depend on developments in the trade wars, the reaction in the financial markets, and the impact on economic data. A decline in inflation would give the Fed an additional argument for an insurance cut.”