BNY’s John Velis expects the Federal Reserve to deliver more easing than markets discount, projecting three rate cuts versus two implied by futures as US labor market conditions deteriorate. He argues that economics, not the new chair’s hawkish or dovish leanings, will drive decisions. Velis also warns that altering balance sheet policy or ending reserve management purchases could unsettle funding markets.

More cuts than futures imply

"Our rate outlook for the rest of this year is more dovish than consensus: We see three cuts compared with two priced by the market, based on our expectation of a deteriorating labor market."

"Note that our outlook does not reflect a view on the new chair’s dovish or hawkish orientation, but rather our expectations for where the macroeconomy is heading."

"We believe economics, rather than the sensibilities of the new chair, will dictate rate policy."

"If and when the macro data reach that point, we don’t think the committee will hesitate to loosen policy in response."

"Changing balance sheet policy would require committee consensus and could create instability in money markets if not offset by the Fed’s open market interventions."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)