Goldman Sachs is warning that a growing consensus that the Federal Reserve will cut rates soon is misguided.
Chairman Jerome Powell said last week the Fed will “act as appropriate to sustain the expansion, ” which the market interpreted as a signal of rate cuts on the horizon.
“Although it is a close call, we still expect the FOMC to keep the funds rate unchanged in the remainder of the year,” Jan Hatzius, the bank’s chief economist, said in a note on Monday. “In our view, this was not a strong hint of an upcoming cut but was simply meant to provide reassurance that the FOMC is well aware of the risks from the trade war.”
“A speech from the Chair focused exclusively on longer-term issues at a time of sharply increased worries about trade policy might otherwise have come across as ‘out of touch’ to some market participants,” he added.
While Goldman is not buying it, traders are increasingly betting on an easing of monetary policy to make up for the potential trade-war damage. The fed funds futures market is pointing to a nearly 70% chance of a rate cut in July and about 60% probability of three rate cuts this year, according to the CME FedWatch tool.
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