Fed Watch: Frontloading rate cuts – Nordea

Research team at Nordea Markets – in the monthly Financial Forecast  report – expects the Fed to cut interest rates in both October and December.

Key Quotes:

Especially the deteriorating macro momentum and the fear of tightening financial conditions too much should weigh in the Fed’s decision-making, while the inflation picture is more mixed. We do, however, see late-cycles warnings linked to the inflation outlook and the slightly de-anchored inflation expectations as clear factors speaking in favour of more easing ahead.
 
We believe the current cycle is comparable with the mid-90s, when after a cumulative 300 bp of rate hikes, the Fed cut rates by 75 bp and managed to fend off a recession. This time, the Fed has hiked by a cumulative 225 bp plus delivered additional tightening via the normalisation of the balance sheet. Acting pre-emptively with two more cuts in October and December could prevent a recession and extend the current expansion. We do, however, still expect the US economy to slow further from here, with the risk of a recession being non-negligible.