Unemployment Concerns Drive Market Expectations for Fed Rate Cuts
In a recent note, Standard Chartered analysts highlighted the sharp increase in the unemployment rate and its potential impact on the Federal Reserve's interest rate decisions. The market has already priced in 60 basis points of additional easing by January 2025, with 46 basis points added in just two days. While the baseline expectation was for two cuts by the end of 2024, there is now a possibility that the Fed may act more swiftly and aggressively.
Despite the market expectations, analysts believe that the Fed is unlikely to implement cuts between meetings or opt for a series of 50 basis point cuts unless faced with a crisis situation. The unwinding of FX carry trades, especially those involving JPY or CNH shorts, may cause some pain, but analysts do not see it as severe as the impact of past crises.
The popularity of steepener trades in the fixed income market has raised concerns about the US economy, leading to steeper yield curves. However, Standard Chartered's team doubts that the current state of equity markets, only 6% below all-time highs, warrants dramatic policy action.
Looking ahead, analysts anticipate a possible 50 basis point cut in September pending confirmation from upcoming data releases. If the data confirms a significant decline similar to the July labor data, a series of sharp cuts could be on the horizon. While a 50 basis point cut in September is not yet deemed necessary, further weak data could prompt the Fed to consider more aggressive measures.
In conclusion, the current economic uncertainties and market conditions suggest a cautious approach from the Federal Reserve. Investors should stay informed and monitor upcoming data releases to gauge the potential impact on their portfolios.