If the Fed does cut by 50bp it risks triggering growth worries, further yen carry unwind

Morgan Stanley analysts on the balancing act at the Fed:

• In the very short-term, we think the best case scenario for equities this week is that the Fed can deliver a 50bp rate cut without triggering either growth concerns or any remnants of the yen carry trade unwind—i.e., purely an “insurance cut” ahead of macro data that is assumed to stabilize

MS on the bond market:

• pricing indicates that monetary policy is behind the curve
• rates staying higher for longer risks disrupturing economy

But, the worry is that a 50bp cut risks being perceived as the Federal Reserve acknowledging trouble ahead for the economy. Such concerns centre on worries over a deteriorating labour market, an economic slowdown, or even recession.

MS also nod to the danger of another episode of yen carry trade volatility.

This article was written by Eamonn Sheridan at www.forexlive.com.