Having priced a high chance of an inter-meeting Fed rate cut last week, interest rate expectations have moderated in the wake of better data and calming words from Fed officials.
Nonetheless, uncertainty surrounding the path for Fed policy rates remains high so here we look at our base case versus market pricing and how alternative scenarios could pan out . Markets trim bets on aggressive rate cuts but uncertainty is high Weaker survey data, softer inflation, subtle shifts in the Fed eral Reserve's thinking and a poor July jobs reportsaw markets dramatically ramp up interest rate cut bets last week.
Scenario two Worries about job lay-offs prompts the Fed to cut rates more aggressively to try and head off the threat of a downturn . The rise in unemployment has so far been caused by labour supply exceeding demand for workers, rather than job lay-offs. However, that narrative starts to change with the number of firings increasing,and in anenvironment of diminishing inflation worries,the Fed cuts rates more aggressively and takes the policy rate into mildly stimulative territory.
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