The Fed doesn’t disappoint

Written by Sebastiano Chiodino , head of LDI at Generali Asset Management (part of Generali Investments )

The Federal Reserve delivered to the markets what they had been pricing in for days. That 50-basis point cut in key rates that Fed Fund futures had already largely anticipated. Consistently, the reaction we are seeing on the bond and stock markets does not show any sense of surprise and probably marks the beginning of a new phase where growth data and the resilience of the labor market will gain central importance also for investors. With yesterday's cut, the Federal Reserve also sent a clear message: The central bank is committed to act promptly to support the economy?not falling behind the curve and is now more confident that?the deflationary trend is strong enough to allow for an easing of monetary restriction to the extent that data will reveal necessary.

The pace of the central bank's next interventions will continue to be dictated by macroeconomic evidence, but the balance of priority has now clearly shifted in favor of the labor market. The Federal Reserve’s shift could now have some repercussions in Eurozone, where a cut in October was not the central scenario and it’s still priced with a 30% probability by the market. The ECB’s determination to act when updated quarterly forecasts are available, at least in this phase, could now conflict with a bolder Fed and prove, at least reputationally, less sustainable despite the different mandates of the two central banks.

For investors, the question that follows this month’s meetings is now to which extent the rate cut heralds a deeper stimulus cycle, which not only removes the constraint on the major economies, but also begins to stimulate them. The next data on both sides of the Atlantic will help to clarify this and could shift the balance of tail risks perceived by the markets around the central scenario of the soft landing, towards more recessive extremes than those contemplated so far.