15 to 21 July: The Fed has reached muddy waters and made them even murkier

Although there was a vacuum in terms of macro data releases throughout the week, we still have a lot to digest. Various Fed officials delivered speeches, in which they argued for their respective views on the next appropriate decision at the end of July. We found it rather difficult to extract relevant information out of their communique. The most controversial speech, in our opinion, was made by President Williams of the New York Fed, who strongly argued that policymakers should act quickly when faced with economic weakness. His words almost convinced the market that the Fed was prone to slash interest rates by 50bp next Wednesday. Not long after President Williams’ remarks, the New York Fed’s spokesman released a statement claiming that the President’s views were of an academic nature overarching experiences of the last 20 years and should not be interpreted as guidance for future monetary policy steps. In our view, this example perfectly encapsulates how difficult it is for anyone to form a strong view on the forward-looking path of interest rates in the US. After much deliberation, we concluded that the FOMC will opt for a 25bp cut at the end of July and will shift to a more inflation-dependent stance. Should this be in fact the case, we will likely to see a 25bp at the end of the year, bringing the Fed funds rate’s target range to 1.75-2.00%. Needless to say, we will remain vigilant and continue to closely monitor every word uttered by Fed officials.

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