Brexit May Force Fed Easing By Year's End

It was less than a week ago that I noted how quickly the mood had changed within the Federal Reserve when it came to raising rates. And, with Brexit, it seems as though opinion has shifted 180 degrees from its earlier position. My go-to guy on the Fed, Tim Duy, is now floating the possibility of a rate cut before the end of the year. The collapse of yields on long term bonds (US 10 year below 1.6%) and the prospect of a long stretch of uncertainty associated with the negotiations for the British exit from the EU has certainly taken any September rate hike off the table. Former Fed member Narayana Kocherlakota is already pushing the Fed to cut rates in July but I doubt the Fed will go down that road. They will do their best to stand pat and wait and see what how conditions unfold over the next few months. But the risks are clearly to the downside and the doves on the Fed are clearly in control. A rate cut before the end of the year is certainly a real possibility. I’m sure the Fed is thanking their lucky stars that the weak May unemployment report forced them to hold off on the June rate increase that they clearly had on the table. In the wake of Brexit, a June rate hike would have been viewed even more dismally than the one in December and been a further blow to Fed credibility. Sadly, it may have only been luck that save us from that disaster.