Key points

 

  • In what has been a somewhat unexplainable move, financial markets have priced in Fed rate cuts starting possibly as soon as March, with a total of six 25bp cuts to come through the year ahead. While US economic data has suggested that the Fed can continue to keep rates on hold for now, there are risks brewing, especially within the plumbing of the US banking sector, that could force monetary policy easing in order to prevent a shock to the financial system.
  • An end to the Fed’s QT program and rate cuts will alleviate such risks. However, inflation remains a concern, and premature policy loosening will risk sparking another inflation episode at a time when the Fed will have little room to manoeuvre to contain it.

 

Baseline View:

While the market has priced in an aggressive monetary policy easing cycle, risks remain that the Fed will  be more cautious. There is only so much that investors can take before they will need to consider that a March rate cut may be too soon and that six 25bp cuts priced in for the year ahead may be too much. However, that is not to say that 2024 will not be a year of policy easing. Growth risks and financial market instability will drive policy loosening, perhaps just not to the extent that is currently expected.

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