According to the latest analysis by ING, a 50 basis point rate cut by the Federal Reserve means it wants to quickly bring interest rates to neutral to avoid an economic recession, and its impact on the US dollar may affect the US election.

James Knightley, Chief International Economist, Francesco Pesole, Foreign Exchange Strategist, and Padhraic Garvey, Head of Research for the Americas, wrote: "From media reports, it appears that the Federal Reserve lacks resistance to market expectations, indicating a tendency towards bold action. Ultimately, only one person held a dissenting opinion, and that was Federal Reserve Governor Bauman, who voted in favor of a 25 basis point rate cut. 'Firmly committed' to supporting maximum employment and bringing inflation back to target levels remains the theme, but the priority is clear. Let policies return to a more neutral setting to avoid the risk of economic recession, as people increasingly believe that inflation is on the path to 2%

Figure: Federal Fund Cap (with time interval between last rate hike and first rate cut)

They stated that many economists believe that "in an environment of economic growth rates of 2.5-3%, historically high stock markets, inflation above target levels, and low unemployment rates of only 4.2%, most Fed officials are unwilling to take such bold action," and there is no clear financial system pressure to support a "more cautious 25 basis point rate cut.

They pointed out that "the main catalyst for this measure may be the narrative in the recent brown book released by the Federal Reserve." "This anecdotal survey on economic conditions shows that only 3 out of 12 Federal Reserve banking regions have reported economic growth in the past 8 weeks, compared to 7 in the last report in July. 75% of Federal Reserve banks reported business activity being flat or contracting, as evidenced by the weakness in ISM and NFIB business surveys. The Federal Reserve believes that policy needs to be quickly shifted from 'restrictive' to 'neutral'

They said, "Our forecast is generally consistent with what the Federal Reserve has stated, which is to lower interest rates to 3.5% or slightly below by next summer. This is based on the fact that the Fed's rapid action can help the US economy avoid recession, just like under the leadership of Greenspan in the mid-1990s." "This view still holds, but we certainly acknowledge that the job market outlook is more worrying, and the risk does lean towards the Fed taking more and faster action

They warned, "Remember, 3% is not a stimulus range, so if economic growth weakens more significantly, then we know the Federal Reserve will cut interest rates

ING believes that steepening the curve is the most meaningful follow-up action. They wrote, "From a front-end perspective, the market's response to 50 basis points is a steeper curve." "Measured by the 10-year inflation breakeven rate, inflation expectations have slightly increased. As the gap narrows, the risk space responds positively. The shock response causes market interest rates to fall net along the curve

In the foreign exchange market, ING expects the accumulation of US dollar short positions to accelerate.

Analysts pointed out, "After the Federal Reserve unexpectedly cut interest rates by 50 basis points, the US dollar fell, but after Powell's remarks seemed to resist multiple 50 basis point rate cuts, the US dollar rebounded." "That is to say, if we believe that a moderate 25 basis point rate cut will not turn the tide for the underperforming US dollar, then a 50 basis point rate cut will release more downward potential. Our calculations of CFTC data show that at the end of August, the total position of the US dollar against the 10 currencies reported entered the net short zone, but these net short positions accounted for about 6% of the open positions, which is quite small compared to the peak of 24% net long positions reached in April last year

They also believe that the impact of interest rate cuts on the US dollar will affect the US presidential election on November 5th.

They said, "If the theme of the past few months has been to release dollar bulls, then the steadily accumulating dollar bears may be the narrative of the US election." "Unless employment data is much stronger than expected and forces the Federal Reserve to adopt more cautious easing policies, the dollar seems bound to remain weak before the US election

They predict: "In November, Trump's victory may lead to a significant rebound in the US dollar, especially if the market establishes a large number of short positions in the US dollar." "If Harris is elected president, we may see the US dollar gradually weaken further by 2025.