Federal Reserve to make a panic cut in September?
The US yield curve is flat as a pancake and the three-month/10-year inversion has worsened dramatically in recent weeks. The US two-year benchmark yield is now 32 basis points below the Effective Fed Funds Rate, or EFFR. The market is increasingly pricing in a Fed rate cut, with the probability now standing at 58% for the September meeting.
Given the current spread between the two-year and the EFFR, a 25 basis point move would be pointless. It will be 50 basis points at minimum, and could go as far as a 75 bps (an outrageous prediction
, but not impossible) move to get ahead of the curve.
It's crucial to remember, though, that every time the Fed begins cutting the Fed Funds Rate it means trouble. It means that the US central bank is forecasting a recession. More importantly, the Fed is always
late, so a cut means that recession is right around the corner.
Watch the US yield curve as guidance for where things will go next, and also note that the Japanese 10-year yield touched -0.1% in today’s session.