There is an undercurrent in economic circles right now that basically boils down to this: The Fed should cut rates by 50 basis points, but it is more likely to cut them by 25 basis points.
Rick Rader of BlackRock Bloomberg was on Earlier today, CIBC made this point, as did its review of the non-farm payrolls report, which it described as mixed.
Overall, this is a tough call for the Fed in terms of how quickly it can cut rates. Growth still looks strong, at about 2% for the quarter, and that’s being driven primarily by consumption again. Part of the slowdown in job gains is due to population flows stabilizing, and as they stabilize, we may end up at or slightly above breakeven. Other labor market signals are clearly pointing in that direction. If they put more weight on these arguments, which are admittedly partly backward-looking, that would push them toward more normal-sized cuts to start and signal a clear path to neutral. But if they want to try to preempt a larger, more massive deterioration in the labor market, that would favor more aggressive cuts to start and then slow down.
They continue to expect a 25 basis point rate cut, but this sentiment highlights why markets tend to push for a 50 basis point rate cut.
This article was written by Adam Bouton on www.forexlive.com.
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