This all follows on from some tentatively dovish comments from Fed Chair Jerome Powell, who has been speaking at the ECB’s Forum on Central Banking in Sintra, Portugal. He acknowledged that the economy and jobs market has been strong, but that inflation is showing “signs of resuming its disinflationary trend” together with a “rebalancing in the labour market”. He refused to be drawn on the timing of any potential rate cut, but markets are now pricing around a 75% chance of a cut at the September FOMC meeting and we agree.

If we get another couple of 0.2% month-on-month or below core inflation prints, unemployment breaking above 4% and more evidence of cooling consumer spending growth, we believe the Fed will start to move monetary policy from restrictive territory to “slightly less” restrictive territory in 25bp increments down to around 4% by mid-2025.