News Analysis: Markets may be too optimistic about Fed rate cuts

Source: Xinhua| 2019-06-18 18:43:25|Editor: xuxin
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NEW YORK, June 17 (Xinhua) -- Markets may have gone too far in pricing in the U.S. central bank's possible interest rate cuts and big disappointments could follow, economists have said.

"The market seems to think that the Fed can save the day ... Just a few rate cuts of the Fed bring everything continuous for the equity market. I'm not sure that's really realistic," said Stephen Gallagher, chief U.S. economist at Societe Generale, in an interview with Xinhua.

He said the market is currently pricing in about 100 basis points in early 2020 and that is a fairly aggressive assumption.

"I think there's room for a lot of disappointment there," he said.

Gallagher added that the Fed may have insurance cuts in mind, but current economic conditions will not prompt the Fed to introduce a full-fledged rate cut cycle.

The Federal Open Market Committee is scheduled to hold its meeting on June 18 and 19, and investors will be looking carefully for clues to the central bank's next policy move.

Market expectations for a rate cut in June were at 20.8 percent, while only 17 percent expected the rate to stay at the same level in July, according to the CME Group's FedWatch tool.

Gallagher said it is possible that the Fed may be willing to talk about insurance cuts at the coming meeting, but unless the central bank sees a more pronounced economic threat, it will not say it will do what it takes to keep the economy going.

Echoing Gallagher's words, Henry Huang, professor at the Sy Syms School of Business at Yeshiva University, said the current interest rates are not at historical highs, so there is not so much room for rate cuts.

Talking about the most recent U.S. economic performance, Huang said the U.S. economy is near the end of its expansion and risks of entering a recession are mounting right now. That is the reason why the market has seen an inverted bond yield curve for a while.

The benchmark 10-year treasury note yield hit a low of 2.08 percent on Monday, well below the 2.23 percent yield of the three-month note.