from Jackson Hole to elections, the scenarios

There Federal Reserve Will he cut rates this year? It is the question that every investor asks himself, after the core inflation of the United States, for the third consecutive month, it surprised to the upside in March. Futures markets currently expect fewer than two rate cuts in 2024, after having served up to six or seven in January.

Fed, inflation nightmare

The chairman of the Fed, Jerome Powell, he did not object to the change in market expectations. After the March inflation data, he admitted that “It will probably take longer than expected” before the central bank has the confidence to start easing its policy.

At the moment, “it is difficult to say whether easing will will materialize this year. Any cuts will be contingent on there being decisive evidence that inflation is converging towards the goal”he writes George Brown, Senior US Economist, Schroders explaining that “this will not only require a weakening of sequential inflation, but will also depend on achieving a better balance labor market conditions.

Jackson Hole turning point?

Another factor – explains Brown – “that could delay any rate cuts is a significant escalation of the situation in the Middle East. One of the risk scenarios hypothesized in our latest economic forecasts concerned the outbreak of a conflict in the region, capable of impacting Western countries.

A similar one scenario would disrupt major shipping channels and oil supplies, increasing the global energy and goods prices. Given concerns about labor market tightness and second-round effects on wages, central banks may be pushed to postpone the start of any easing cycles.”

The scenarios

Apart from this risk,” it is unlikely that there is sufficient progress in both inflation data and employment data to infuse the FOMC the confidence needed to cut rates by the June or July meetings. We may see enough progress before the Fed's rate-setting committee meets in September.

It is possible that Powell will lay the groundwork for a loosening in his keynote address at the symposium Jackson Hole in August. A rate cut in September would also have the added benefit of being accompanied by an updated dot plot, which the FOMC could use to convey its expectations for the timing and extent of any easing.”

Our expectation – continues the expert – “is that this will follow two more cuts, in the December and March meetings. However, we believe the committee will struggle to justify further rate cuts thereafter. At that point inflation should be at the target level, while unemployment is likely to remain low. This means that the FOMC will likely have achieved its dual mandate objectives of price stability and full employment. This cycle of three cuts would provide a cumulative easing of 75 basis points, the same amount as in 2019, which in turn was modeled on the mid-cycle adjustment made in the mid-1990s.”

Could elections affect timing?

In any case, the balance of risks “is clearly tilted towards fewer and later cuts. While the evolution of the data will be the determining factor, we do not discount the possibility that the November 5 elections could influence the timing and extent of any easing.

For example, the FOMC could wait until its December meeting to cut rates by 50 bps or keep them unchanged, depending on whether the election outcome is expected to have a significant impact on the economic outlook.”

Cut or rise

There is also a fair probability – concludes Brown – “that the FOMC will not ease tofmade monetary policy this year. We currently attribute a 40% probability to this scenario; this is a risk that, in our opinion, is currently underestimated by the market. Furthermore, if inflation begins to reaccelerate, the committee's next move could not be a cut, but an increase.”