Synopsis:

MUFG maintains its forecast for a 50bps rate cut during today's FOMC meeting, arguing that the Fed needs to adjust its monetary stance proactively in response to shifting economic conditions.

Key Points:

1. FOMC Rate Cut Expectation:

   • MUFG expects the FOMC to cut rates by 50bps today, framing this move as a proactive measure to align the monetary policy stance with current economic realities.

2. Shift in Focus:

   • The dual mandate's focus has shifted from combating high inflation to addressing rising unemployment, necessitating a more aggressive approach to rate cuts.

3. Communication Strategy:

   • A 50bps cut allows the Fed to clearly communicate its intention to preemptively manage economic conditions, using the Summary of Economic Projections (SEPs) to indicate a potential total of 100bps in cuts for 2024.

4. Market Reactions:

   • If the 50bps cut occurs, the 2s10s curve is likely to steepen, potentially reaching new cyclical highs not seen since June 2022.
   • USD/JPY could drop below the 140-level, with the possibility of reaching new lows quickly.

5. Alternative Scenario:

   • A 25bps cut could initially extend the current USD/JPY uptrend, but concerns about the Fed being behind the curve may lead to increased market volatility, causing any gains to diminish swiftly.

Conclusion:

MUFG's forecast for a 50bps cut reflects a strategic response to evolving economic conditions. The anticipated market reactions highlight the potential for significant shifts in the yield curve and currency values, emphasizing the Fed's role in navigating current economic challenges.