what to expect from the FOMC meeting

The week of Federal Reserve has arrived, but as happened with the ECB, no significant changes are expected in terms of interest rateswhich will be confirmed in an oscillation band between 5.25% and 5.50%. A level on which they will still remain “long” according to what has been reiterated several times by President Jerome Powell and other bankers of the FOMC, the monetary policy committee of the Federal Reserve.

To tell the truth, I am not expecting interest rate cuts even in June, while the most recent inflation data, somewhat disappointing, had moved the horizon of a cut further, to September, while the latest GDP data released on April 25, it revived a serious plague for the US economy, stagflation.

GDP and inflation disappoint

The American GDP of the first quarter of the year recorded a annualized growth of 1.6%, a measure obtained by multiplying GDP growth by four quarters. A figure that marks a sharp setback compared to the 3.4% of the previous quarter and the 2.5% indicated on average by analysts' expectations, reintroducing the probability of a recession in the USA.

But also to price growth of excessively strong confirmation. The price index recorded on personal consumption expenditure (PCE price index), a measure of inflation most closely monitored by the central bank, recorded an acceleration in the first quarter at 3.7% from +2% in the previous quarter, greatly exceeding expectations. The inflation figure for March, released at the beginning of April, had already signaled an acceleration to 3.5%.

Weak growth and inflation that is still too high thus constitute the possibility of stagflation, which in the macroeconomic context is precisely that situation in which low growth or recession is associated with price growth that is too high and somehow anomalous in a scenario recessive.

What the analysts think

“The GDP data could weigh on the Fed's decision scheduled for next week,” says Richard Flax, Chief Investment Officer of Moneyfarmadding “so far the resilience of the US economy has helped to remove the possibility of a rate cut, but this unexpected slowdown could be the signal that policymakers were waiting for to proceed with a reversal of course”.

For John Kerschner, Head of US Securitized Products and Portfolio Manager of Janus Henderson, “Powell's accommodative stance at the end of 2023 clashed with significant inflationary pressures and a more stable and resilient US growth environment”, but the “recent inflation data, stronger than expected, made markets nervous” and so “the Fed has gone back to observing the 'data' to make decisions”. The analyst therefore believes that “the Fed's patience is the right approach”, while investors should not try to guess the timing of a cut, but “take advantage of these very high yields in a ten-year perspective and, like the Fed, continue to look at the data.”