Columbia Threadneedle: Fed to cut rates this week, but also signals pause in further cuts
Here's a preview by Dave Chappell, Senior Fund Manager, Fixed Income at Columbia Threadneedle Investments ahead of this week’s Fed meeting.
“There is a risk that US rates may rise from here, particularly longer dated Treasury yields. The Fed has been able to focus on the evolving employment and inflation conditions in recent months but will have to begin to factor in Trump policies as they become law. We believe that the decaying fiscal situation is unlikely to see any improvement over the coming years, and this could weigh on longer dated bonds, keeping their yield elevated. Whilst inflation remains on a path to target at present, the threatened tariffs on imported goods from all countries will have the immediate effect of lifting prices, if initiated, although by how much will depend on whether companies can pass the additional costs through to the end user. If the tariffs were to hurt consumption, there is a chance that employment could weaken, leaving the Fed the unenviable mix of both higher prices and unemployment. For now, the risks to inflation and employment are described by the committee as balanced, which leaves the door open to another rate reduction this week, but this will likely be accompanied by pause signal , via the ‘Dot’ forecasts, as they assess the ramifications of potentially large shifts in forthcoming domestic policy."
"We believe that full implementation of proposed Trump policies could lead to wider spreads between front end and longer end interest rates in the US and Europe. There are areas of the Eurozone which have been struggling to grow, and certain Trump policies are likely to have a further negative effect on these countries. This should lead the ECB to be more active than the Fed in reducing rates.”