The Fed will cut rates, but will remain under market (and Trump) pressure

Berenberg experts expect a rate cut next Wednesday, but add that they also anticipate "another cut of 25 basis points in the fourth quarter"This new reduction that the market is already discounting may be, according to these analysts," at the meeting in late October or in the middle of December. "

In his opinion, this will depend on the "development" of the trade war between China and the US and of the "perception of the risks for the American economy" that the Fed has "due to lower global growth and the evolution of the financial markets, as well as the evolution of the inflation and the economic growth".

In this sense, Berenberg points to an interesting nuance. "Our forecast is based on what we believe the Fed will do, not in what we think you should do, which is to keep rates unchanged"In his opinion, the drop in rates will not have "a material effect on growth or inflation "because it will not serve to mitigate the risks facing the US: the lower global growth caused by the trade war and the uncertainty created by the Brexit.

In his opinion, lowering the rates will now be useless and "reduce the Fed's future flexibility to respond adequately to a recession that will eventually occur"And they add that" the president Powell has identified the lower effective limit as the rate as the biggest challenge facing "the central bank.

For Berenberg, the main problem in the US is "the erratic trade policy that follows Donald Trump", which is causing" a uncertainty "unprecedented, whose economic impact is practically impossible to quantify. So, these "preventive" cuts that the Fed is making assume "a great dilemma"for the monetary agency.

In the same vein, the experts of RBC Capital Markets They point out that "the main justification for rate cuts remains the risk of contagion to the US economy due to the weakness of the global context." But in his opinion, this justification is "doubtful", despite which they also anticipate a new rate cut before the end of the year.

From the Dutch bank Rabobank, say the Fed is allowing Donald Trump to be tougher in his trading stance with China, because "is magnifying the impact of global uncertainty every time you cut rates"In his opinion," all Trump needs to do is impose tariffs or increase his protectionism so that the Fed continues to cut "interest.

Therefore, they consider that "the Fed is reinforcing Trump's position and makes an escalation of the trade war more likely"for their efforts to mitigate the impact of the policy of the American president. Therefore, they conclude that" there is a strong connection between commercial and monetary policy that will force the Fed to cut rates again in the fourth quarter"As it is, the central bank will remain under enormous market pressure, and Trump's, in the coming months. Whatever its position on interest rates.