From the central bank's perspective, in view of high inflation and extremely low unemployment, the focus is currently exclusively on the inflation target. Economists at Commerzbank analyze how Fed rate cuts will impact bonds and FX markets.
“If price pressures ease, the Fed should see scope at the end of 2023 to reduce the high key interest rates at least somewhat. However, if the recession does not materialize, there would probably be no easing.”
“In the bond market, the current improvement in the US economy suggests that the market will question the rate cuts expected this year in the coming months. We, therefore, expect the 10y US Treasury yield to rise to 4% in the first quarter. With clearer signs of a recession, inflation rates continuing to fall sharply, and the Fed rate cuts we expect, we then see the potential for a decline to 3% by the end of the year.”
“If Fed rate cuts become more likely, the USD is likely to come under renewed pressure on the currency market. However, too much additional dollar weakness is no longer to be expected, as the market has already factored in Fed rate cuts.”
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