Probability of a Fed Rate Cut Increases

Market Trends - 28/06/2016

The markets continue to reel under Brexit inspired risk aversion, which has engulfed the global markets and upset the financial and political status quo. Following the UK's departure from the EU, the markets are now pricing in a Fed rate cut in the coming months instead of a rate hike. Before the Brexit referendum, Fed members voted to keep rate hikes steady at 0.50%. Still, there was hope that the Fed could hike rates as early as August or September. Those odds plummeted following last Friday's Brexit verdict while the odds for a rate cut have increased dramatically from 7% on Friday, 23rd June to 17% by Tuesday, 28th June.

Fed policymakers at their last meeting in June indicated that they expect to hike rates twice this year but investors now believe that further policy tightening from the Federal Reserve would only increase market volatility and uncertainty. Alistair Darling, the UK's former Chancellor and now board member of Morgan Stanley said that the markets are looking worse than they were in 2008. Echoing similar views was BlackRock's CIO Rick Rieder, who said that the Brexit vote could now dissuade the Fed from hiking rates in the foreseeable future.

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