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The Federal Reserve is not expected to adopt a 50 basis points rate cut at its monetary policy meeting on July 31, according to the latest report from DBS Economics and Strategy. Also, market conditions do not warrant an urgent response from the central bank.
Over the past week, the market has gyrated between a 50bps cut and a smaller move. Most of this has got to do with clarifications that NY Fed William’s strongly dovish comments were “academic” and had nothing to do with the imminent monetary policy stance.
However, judging from the reactions in the rates space, market participants appear overly eager to drive USD interest rates lower.
"We maintain that the case for a sharp easing cycle is weak. With US data holding up, pre-emptive “insurance cuts” is the only way to justify lower rates. “Insurance cuts” should not amount to more than a cumulative 2-3 over the coming few quarters," the report added.
Typically, financial conditions have to tighten via widening credit spreads and a deep equity market selloff before the Fed cuts by more than 25bps at a go. When these events took place in Q4 last year, it prompted a dovish Fed pivot.
However, these conditions are absent at this point, with credits and the stock markets holding up. A measured rate cut cycle remains the most likely scenario.
