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Pavlov's Markets Salivate at Sound of Impending Rate Cuts

ECB and Fed are signaling a shift toward an easy monetary policy.

Prices rose across all financial markets, all asset classes, and all over the world last week, spurred by global central banks' shift toward easy monetary policies. The rally began Tuesday, after European Central Bank President Mario Draghi publicized that the ECB was considering instituting new stimulus programs in July. These could include a cut in the ECB's already negative short-term interest rate, additional bond-buying programs, and/or additional guidance that the central bank could leave its short-term interest rate at a negative yield even longer. The rally then picked up steam after the U.S. Federal Reserve intimated that it too was shifting toward an easy monetary policy.

According to the CME FedWatch Tool, a rate cut is all but assured following the Federal Open Market Committee's July meeting. Currently there is a 67% market-implied probability of a 25-basis-point rate cut and a 33% chance of a 50-basis-point cut. Even after a rate cut (or two) in July, the market is expecting additional rate cuts before the year is over. Following the December meeting, the market-implied probabilities that the fed-funds rate will fall from its current range of 2.25%-2.50% to the following ranges are:

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