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As soon as data on job openings and layoffs confirmed the weakness of the US labor market, the chances of a 50 basis point cut in the federal funds rate in September jumped to nearly 50%, and the yield curve came out of the inversion state. The difference in rates on 2– and 10-year bonds was in it for 26 months. Usually, a Dollar return of the indicator above the zero mark signals a downturn in the US economy, which was immediately reflected in EUR/USD. The pair rose. But how long will the bulls’ celebration last?
Investors quickly recalled that the Federal Reserve had previously thrown the economy a lifeline during recessions. The central bank provided support by launching quantitative easing programs or sharply lowering the federal funds rate. Its balance sheet is already inflated, and the effectiveness of QE is in question, so it’s no surprise that derivatives have increased the scale of the anticipated reduction in borrowing costs. They predict that rates will fall to 3% in 2024–2025.
Such expectations seem overly aggressive. The markets demanded approximately the same from the Fed during Saddam Hussein’s invasion of Kuwait, the dot-com bubble, and the global financial crisis of 2008. The current situation has little in common with those events. Yes, the US economy is cooling, but it’s too early to talk about a recession when GDP expands by 3% in the second quarter.