Anders Svendsen, analyst at Nordea Markets, suggests that the US activity indicators have disappointed, the trade war has escalated and a bigger part of the yield curve has been inverted since the July FOMC meeting and in other words, the Fed has plenty of reasons to turn more dovish.

Key Quotes

“We expect the Fed to cut its key policy rates by 25 bp at next week’s FOMC meeting – which would be the second consecutive rate cut in the current easing cycle – taking the Fed Funds corridor to 1.75-2.00% with an Interest On Excess Reserves (IOER) rate of 1.85%. Two hawks will likely dissent...again.”

“We expect the Fed to signal its intention to “act as appropriate to sustain the expansion”, which we take to mean that more rate cuts are likely if and only if the outlook worsens. The outlook has worsened, though – perhaps enough for the new dot plot to show a third rate cut later this year.”

“A rate cut is more or less priced in by the market so the words of Mr Powell and the outcome of the dot plot chart will likely be what determine market reactions. We expect a softer stance from the Fed, which should satisfy the fairly dovish market expectations going forward. In our view, it would be a massive hawkish surprise if the Fed were to leave rates unchanged.”

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