Fed’s dovish shift embraced by markets

Although only a minority of Fed officials anticipate that interest rates will need to be cut at all this year and not a single official believes that rates will need to be reduced by more than 50bp in total over the next few years, the markets nevertheless hailed the Fed’s changes as “dovish” and are now on the way to pricing in a rate cut of up to 50bp next month and more than 100bp of loosening over the next 18 months. Admittedly, in his press conference, Chair Jerome Powell did at least appear to entertain the idea of a rate cut in July, possibly even a 50bp cut, but it would presumably require a further deterioration in the incoming data – since Powell also acknowledged that there was little support for an immediate rate cut this week. Although it is a close call, we still think the Fed will end up delaying the first rate cut until September, as we’re not convinced the incoming data will suddenly roll over that badly and we suspect that, even if the negotiations ultimately prove fruitless, a Trump-Xi meeting at the G20 leaders’ meeting at the end of this month will fuel some short-lived optimism that a trade deal is on again.