US | The quest for a soft landing begins

Summary

Fed’s focus has shifted to the labor market and, in view of monetary policy lags, achieving a soft landing is now its main worry. This means the FOMC will not wait for weak labor market conditions before softening the policy stance.

Key points

• Key points:
• The continued strength of consumer spending despite some survey-based pessimism suggests the Fed is more likely to deliver a 25 bp rate cut this week.
• Weaker-than-expected jobs data raised concerns of a recession and a more aggressive Fed’s response, but we think the “gradually-rebalancing” narrative still holds.
• Inflation concerns have largely left the spotlight, but the stickiness of housing inflation will likely prevent the Fed from explicitly declaring victory on this ground.
• Despite the futures market’s consensus on the initial movement direction, opinions remain split on the magnitude, with a 60% implied probability of it being 50 bps.
• We now expect a rate cut cycle of consecutive 25bp rate cuts at each meeting until the fed funds rate comes down to 3.0%.

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