In front of progress on inflation defined “modest”, the Fed intends to cut i interest rates just once. While the rise in consumer prices has slowed, the 2% objective remains far away, so much so that the central bank has revised its inflation estimate for this year upwards to 2.6% from the previous 2.4%.
After the Fed's announcementwhich certified the possibility of a reduction of a quarter of a point of the cost of money this year, Wall Street slows down but it remains on the rise. Swaps indicate that the cut could arrive at the meeting on November 6 and 7, therefore after the American elections.
The Fed's restrictive policy
There monetary policy is “restrictive” and the Fed is prepared to leave rates high for as long as needed against inflation, Fed Chair Jerome Powell said.
“Recent indicators suggest that economic activity has continued to expand at a solid rate. THE progress on the labor market remained solid and the unemployment rate low. Inflation has slowed in the last year but remains high. In recent months there has been modest progress towards the 2% target – states the Fed in the statement released at the end of the two-day meeting -. The economic outlook is uncertain and the Fed is alert to inflation risks. We do not expect that it will be appropriate to reduce rates of interest until we have one greater confidence in inflation that it moves towards 2%”, specifies the Fed, reiterating its “strong commitment to bringing inflation back to 2%”. The Fed says it is ready to adjust its monetary policy if necessary should risks emerge.
The position of the White House
“The Fed is independent and we do not comment on his actions. As an administration we have always been careful to leave the Fed its space – said the White House spokeswoman Karine Jean-Pierre –. There is still work to be done on inflation“. A clarification to clarify that Biden is not like his rival Donald Trump who, during his term in the White House, intervened several times and criticized the Fed.
The fact remains that high prices are a problem for Joe Biden as they undermine his efforts to revive the economy and put his re-election chances at risk. The president is, in fact, rejected by the majority of Americans on his management of the economy and above all on price trends. “Prices are still too high but the data shows progress in decreasing inflation. I know that many families feel the pressure of the high cost of living and for this reason I am fighting to lower costs”, assured Biden after the May data.
Rate cut likely in December
“There will be three encouraging facts to convince the Fed that the situation has changed and that inflation is heading sustainably towards 2%, which is the bar that the commission has set for cutting rates. The earliest possible date is September, if we assume that the next two inflation data are similar to today's. I'm not ready to make that assumption yet, having only seen one good inflation in five this year.
My prediction – says Eric Winograd, Senior VP and US Economist of AllianceBernstein – it remains that the Fed will cut rates once this yearwith December as month more likely for cutting. There are signs that there could be an early start to the easing cycle, based on yesterday morning's inflation data, but the baseline is unchanged. I continue to expect the terminal rate for this cycle to be 3.0-3.5%, which is a bit higher than the Fed's rate. If the economy continues to expand at or near current rates, I suspect that the Fed's long-term estimate will move higher over time.”
Hawk-like trajectory
“The Fed's acknowledgment of 'modest progress' toward its 2% inflation target likely stems from disinflationary signals emerging from May's CPI data, in contrast to first-quarter inflation data, higher than expected. However, – highlights Whitney Watson, Co-Chief Investment Officer and Co-Head, Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management – the median projection of the dot plot has taken a hawkish trajectory, so much so that it now indicates a single rate cut in 2024, compared to the three cuts previously expected in March. While slowing core CPI inflation may partially dampen the market's hawkish sentiment, driven by solid jobs data released last Friday, the Fed's path to a rate cut depends on continued easing of inflation and by a further rebalancing of the labor market. Recent economic data and signals from policymakers highlight the intricate challenges in determining the exact timing of monetary policy changes, highlighting the importance of a flexible and dynamic approach to investment.”
Door open to rate cuts within the year
“No surprises from the Fed which left monetary policy unchanged, but which continues to keep the door open to rate cuts during this year. Indeed, – says James McCann, deputy chief economist of abrdn – the median of FOMC members now expects just one rate cut in 2024, compared to three expected in March. This carried out like a hawk it was likely a reaction to stronger-than-expected price growth in early 2024, which forced committee members to once again revise their inflation forecasts upward. However, the current CPI inflation's downward surprise was more encouraging And, with the majority of members split between one or two cuts, we wouldn't be surprised to see market prices continue to fantasize about more rate cuts this year.”
Fed, stable rates, cautious approach
“The Federal Reserve's decision to keep interest rates at 5.50% for the seventh time reflects the continuity of the gradual approach adopted by the central bank, which remains cautious in the face of inflationary trends. The Fed's economic forecasts now speak of more stable inflation in 2024 and a slightly higher unemployment rate in 2025. Policymakers – underlines Richard Flax, Chief Investment Officer of Moneyfarm – welcomed a rapid deceleration of price increases in 2023, but have become more cautious after progress on inflation stalled earlier in the year; currently plan to lower the policy rate by just 25 basis points this year“.
