Fed back to zero – Rabobank

Rabobank analysts suggest that in light of the recent escalation of the US-China trade conflict they now expect the Fed to make two additional insurance cuts of 25 bps each before the end of the year.

Key Quotes

“By taking a risk management approach to trade policy uncertainty, the Fed is amplifying the effect of trade policy on monetary policy. There is now a strong feedback loop between trade policy and monetary policy that will force the FOMC to make more insurance cuts in the coming months, probably as early as September and October.”

“We still think that the insurance cuts won’t be enough to avert a recession in the second half of 2020. According to our recession radar the probability of a recession climbs above 50% in June 2020 and peaks at 81% in December 2020. Therefore, we expect the Fed to start a full-blown cutting cycle in 2020 that will bring the federal funds rate back to the zero bound before the end of 2020.”