Will the Fed Cut By 2% Before Year-End?
Will the Fed Cut By 2% Before Year-End?
The cutting cycle looks more and more likely by the day and we find that the Fed needs to cut by 200 bps to stabilize the deposit base of banks. Here is why!
200 bps worth of cuts this year? I think that is a feasible scenario by now.
This week, the Fed will likely hike by 25bps to try and regain control of the narrative. The hike will end up exaggerating the deposit outflows as banks will not track the Fed Funds higher in their deposit rates.
The Fed will soon thereafter soon communicate an end-date for QT to alleviate some of the collateral pressures seen in the market.
Emergency cuts are in play before the May meeting, if the deposit flight accelerates, which is not unlikely as long as the broader FDIC guarantee is not in place
We find that 200bps worth of cuts are needed to re-steepen the yield-curve sufficiently to combat the underlying reasons for the banking crisis.
The Fed Funds rate is dictated by the Eurodollar curve shape and when markets scream loud enough, you better listen. Look at the ED4-ED12 spread as a predictor of Fed Funds. Given the most recent repricing of the Eurodollar curve, we feel very comfortable saying that rates will peak this Wednesday and cuts are likely to arrive sooner rather than later thereafter.
We have very little insight into Fed’s thinking at the current juncture due to the blackout period, but given the vibes around the SVB depositor bailout, we’d argue that the Fed is still some way from throwing in the towel on the hiking plan(s).
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Chart: Fed Funds peaks NOW
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