"To make the case for Fed cuts outside of a recession, the FOMC would have to conclude that policy is actually restrictive," argue TD Securities analysts and go on to explain:

"Given that most estimates of the neutral rate in the Fed’s dot plot are above current levels, Fed officials would have to reduce their estimates of r*. The distribution of longer-run dots have drifted modestly lower, but we see a fairly high hurdle for the median to fall below the current fund rate range. Indeed, a case can be made for a somewhat higher neutral rate — particularly if productivity improves."

"Recent increases in productivity growth create a complicated environment for considering the possibility of Fed rate cuts: inflation may be lower as a result, but the neutral policy rate (r* in real terms) should be higher."

"This observation contrasts with current market pricing, suggesting the market-implied likelihood of rate cuts this year may be over-estimated. Look for markets to reprice slowly if productivity gains continue, more quickly if inflation stabilizes or rises later this year. If inflation slows unexpectedly, however, a broader rethink of the neutral rate by Fed officials becomes more likely."