By Chris Anstey
Originally Published on Bloomberg
The fourth-quarter sell-off in U.S. stocks and credit seems to have accurately presaged a weakening in economic data, along with a dovish Federal Reserve pivot. That may help explain why some market observers are discussing the potential for an interest-rate cut.
Matthew Hornbach, head of interest-rate strategy at Morgan Stanley, said in a report Monday that his bank’s economists still forecast a hike in December. Yet he argued a reduction would fit with the “framework for this Fed — one that wants to ‘keep the party going,”’ should economic data continue to disappoint and the recent Treasury yield-curve inversion stretch beyond the central bank’s meeting in June
“The longer the market discounts easing, the more likely it is that the market is saying policy is too tight,” Krishna Guha, head of central bank strategy at Evercore ISI, wrote in a note Tuesday delving into scenarios for a rate reduction. “If the Fed cuts rates in the coming months it is likely to cut aggressively,” he added. It might signal at least 1 percentage point of cuts “at the outset and potentially move relatively quickly.”
A rally in Treasuries has sent yields tumbling. Fed funds futures are pricing in at least a quarter-point cut from the U.S. central bank by year-end. As to whether that proves accurate, analysts point to measures in the job market to watch.
“It’s worth noting that since the Fed started publishing data for the policy rate target in 1971, they have never cut rates, let alone started an easing cycle, with jobless claims this low,” Cameron Crise, a macro strategist who writes for Bloomberg, wrote Tuesday. “The Fed is going to be a lot more sensitive to trends in the economy” than in futures trading, he wrote. “Keep an eye on claims.”
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