At its last FOMC meeting (11-12th June 2024), the US Federal Reserve maintained its benchmark interest rate unchanged at 5.50%; this for the eighth consecutive time since July 2023 when it was last hiked from 5.25% to its current level. Since then, US central bankers have opted to hold firm on their monetary policy amid persistently elevated inflation prints in the world’s leading economy. While inflation is now clearly on a downtrend, it remains, at around 3.3%, substantially above the US Federal Reserve’s target of inflation at 2.0%.
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Going into 2024, financial markets were expecting at least six interest rate cuts over the next twelve months whereas current sentiment expects only one cut. Such a sharp repricing of monetary expectations in the market has kept financial conditions restrictive in the US Dollar space for a longer period than initially thought. We believe there is a high probability of a weakening of the US economy in the coming months as an increasing number of companies and households are potentially forced to refinance at significantly higher rates, negatively affecting profitability and purchasing power.
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Recent history has seen similar periods of interest rates plateau followed by a period of substantial economic slowdown. While a repeat of the Great Financial Crisis of 2008 is not our base case scenario, one should not ignore the elephant in the room: the recessionary environment that usually unfolds at the end of every economic cycle.​