ABN AMRO Senior Economist Rogier Quaedvlieg argues that under Kevin Warsh, the Federal Reserve’s ‘conviction-based’ approach and a more dovish reaction function point to lower rates despite a bullish US outlook. The bank expects 75 bps of cuts this year and sees policy converging toward a 3.00% Federal Funds Rate by year-end, even with above-target inflation.
Warsh era seen reinforcing dovish bias
“In the nearer term, we should probably expect less transparency, with less communication and guidance from FOMC officials.”
“Most important for the near term, however, is his idea of ‘conviction-based’ policy.”
“Despite that, we do still see more rate cuts than current market pricing would suggest.”
“While that may seem inconsistent, the answer lies in a more dovish reaction function of the Fed which has gradually revealed itself over the past half year, where inflation above target carries significantly less weight than any potential threats to employment.”
“With the current median SEP forecast, there is room to continue easing at 25 bps pace.”
“Our base case of stronger inflation prevents this continued easing in the near term, but the implied policy rate converges to an upper bound of the Federal Funds Rate at 3.00% by year end.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/fed-conviction-cuts-and-dovish-reaction-abn-amro-202602251226
