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Rabobank analysts point out that last year, the Fed made a U-turn by abandoning its hiking cycle and making three insurance cuts.

Key Quotes

“From here it will take a ‘material reassessment’ of the economic outlook to change the Fed’s view that monetary policy is well calibrated after the three insurance cuts made last year.”

“However, the same forecasting framework that helped us pinpoint the end of the Fed’s hiking cycle in 2019 is also indicating that the three insurance cuts of this year will not be enough to prevent the economy from sliding into a recession by the summer of next year. Consequently, the Fed will have to cut rates all the way back to zero before the end of 2020.”

“A resurgence of the trade conflict between the US and China, or other possible trade conflicts involving the US, could add to pressure on the Fed to cut rates this year, through a feedback loop between trade policy and monetary policy.”

“Even if our baseline scenario of a recession is avoided, in the next most likely scenario of an economic slowdown we also expect the Fed going back to zero.”

“At this stage, it still seems unlikely that the Fed will take its policy rates into negative territory.”

“Meanwhile, we expect the Fed will continue to have to intervene in the money markets as the repo turmoil seems far from over and the effective federal funds rate is again pushed away from the midpoint of its target range.”