Chart of the week

US benchmark-rate expectations have changed in recent weeks as escalating trade tension fuels fears of a growth slowdown in the US and the rest of the world. Fed funds futures contracts now price in three 25-basis-point cuts this year compared to a single cut a month ago.

OUR ANALYSIS

Various Federal Reserve statements are delivering the same message: the current outlook for the US economy does not warrant a rate cut, but the central bank stands ready to act if uncertainty, in particular over foreign trade, becomes a drag.

The sharp slowdown in job creations in May could be a leading indicator of a weakening labour market, but jobs data are notoriously volatile and other indicators, such as weekly jobless claims, are not signaling such weakening.

In the past (1995 and 1998), the Fed has been known to preventively cut rates, but the moves came in response to considerable financial pressure that is absent from today’s landscape.

Only a significant downturn in the US economy and/or the financial backdrop would prompt the Fed to follow market expectations. This is far from the case.

The opinion expressed above is dated June 12th, 2019, and liable to change.

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