Are investors placing too much hope in the Fed? As US-China trade war lingers, analysts see fewer rate cuts than markets
- Financial markets expect the US Federal Reserve to cut interest rates by 75 basis points this year
- Analysts, economists see an ‘insurance’ cut, with more cuts only if the trade war intensifies
As uncertainties over the US-China trade war continue to weigh on sentiment, investors are increasingly looking to the US Federal Reserve to cut rates and provide a boost to what has been an extended economic cycle.
Investment strategists and economists, however, said financial markets may be a bit too optimistic about where the central bank is headed – and that could be bad for emerging markets.
The financial markets are expecting as many as three interest rate cuts – or about 75 basis points – this year. Most observers, however, said they expected cuts of 25 to 50 basis points, unless the trade war escalates further.
“Given that the market is pricing in roughly three rate cuts by the end of the year, anything less would disappoint expectations and cause headwinds for Asian credit and currencies,” Mark Haefele, UBS’s chief investment officer for global wealth management, and Min Lan Tan, the head of the Swiss bank’s Asia-Pacific chief investment office for global wealth management, said in a recent report.
The Fed is expected to announce its decision on interest rates on July 31, but investors could get a preview when Fed chairman Jerome Powell testifies over the next two days before the House Financial Services Committee and the Senate Banking Committee in Washington.
Hiring rebounded strongly in June in the US, easing fears the American economy was weakening, and could take pressure off the Fed to act immediately.