"Like it or not, the Fed is in the midst of a race to ease, and lagging only makes it more likely that policy rates will have to revisit the zero bound because a stronger dollar will put downward pressure on already below target core PCE inflation", Deutsche Bank's Stuart Sparks wrote, in a Friday note following Jerome Powell's Jackson Hole speech and China's retaliatory measures on $75 billion of US goods.
Sparks was reiterating a thesis discussed earlier this month. If the US economy continues to outperform relative to its trading partners and the Fed refuses to ease aggressively in the face of dovish pivots abroad, the dollar will remain resilient and the US will import disinflation, thereby making it even harder for the Fed to hit its mandate.
As we wrote last week, if you’re looking for reasons why the market is pricing aggressive easing from the Fed, you might think about it through that lens, rather than through the lens of a recession. That is, it might not be that the market sees something the Fed doesn’t in the data, “it could be that the market is associating a full easing cycle with a somewhat different scenario or set of scenarios that ultimately require much l
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