Fed: Rate cuts coming – Nordea Markets

Anders Svendsen, analyst at Nordea Markets, suggests that they are changing their Fed forecast and adding four rate cuts starting in July.

Key Quotes

“Fed pricing has changed rapidly during the past month, and Fed Chair Jerome Powell recently opened the door for policy adjustments if needed.”

“Rate cut discussions will take centre stage at the June FOMC meeting. While the first rate cut looks likely in July, the additional three rate cuts in our forecast hinge on our economic slowdown scenario materialising.”

“Why

There are three main reasons why we believe that rate cuts are now likely: 1) the escalation of the trade war; 2) markets' recession fears; and 3) the Fed's change in reaction function, with increased focus on too-low inflation and inflation expectations.”

“When

We expect rate cuts to be the major topic at the June FOMC meeting and the first rate cut could be delivered in July. Markets are currently pricing a three-in-four chance of a rate cut by July.”

“What

We expect the Fed to continue cutting rates at a quarterly pace until the economy shows signs of recovery, which in our forecast is towards the middle of 2020. Four rate cuts over the course of the next year is roughly in line with current market pricing.”