Markets overestimate the Fed’s room to cut rates and EM spreads may be cut off from their liquidity lifeline. Investors expecting more than 50 basis points of easing from the Federal Reserve (Fed) this year may find themselves disappointed on New Year’s Eve.

While interest rate futures are pricing in a 100% probability of a quarter-point rate cut in September after a benign July headline inflation reading, overall, current data shows that the Fed has less easing capacity than global markets seem to be clamouring for.

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