Fed rate cuts could make carry trade unwind worse worse, economists warn

Rapid interest rate cuts from the Federal Reserve could make matters worse for the global “carry trade” unwind, according to economists at TS Lombard.

“The natural reaction from the Fed to soft labour market data and fresh recession risks would be to cut rates and to do so relatively rapidly. But this would exacerbate any carry trade unwind,” economists at TS Lombard said in a research note published Monday.

“The US economy should trump all else, but it would make sense for central bankers to be cautious,” they added.