Summary:
- MUFG Current Fed Views: Although interest rate probabilities have fluctuated between 25bp and 50bp for the first cut, given the slide on pros vs cons, we maintain our view the first cut will be 50bp (we changed our view to a 50bp cut in early August post the weak July NFP and market volatility). Chair Powell can moderate the impact by suggesting that the size and scope of future Fed cuts will be predicated on the evolution of the “totality” of the data and their assessment of the US outlook. As per previous slide, it could be a “hawkish 50bp cut” if the 2024 terminal rate implies only 3 cuts.
- If the Fed cuts 50bps now, given the next meeting is after the elections, the second cut is equally as challenging to discount. It would make sense to slow to a more moderate pace. We assign a very low risk of a skip due to election vol. We separately list the potential Fed reaction function to full blue or red sweeps. Meanwhile, gridlock outcome is currently embedded in S1 & S2 base case path.
September FOMC Scenarios
|
Scenario |
Probability |
Assessment |
|
Dovish Cut (-50bp) |
10% |
|
|
Hawkish Cut (-50bp) Base-Case |
60% |
|
|
Dovish Cut (-25bp) |
20% |
|
|
Neutral Cut (-25bp) |
10% |
|
Please see the link above for the PDF with macro and market charts and scenarios table…
