Investors and analysts assume that interest rates have peaked in the United States. Although Federal Reserve Chairman Jay Powell tries to keep alive the possibility of an additional turn of the screw, in reality the question is no longer whether the price of money will rise further. What is being talked about now is when the declines will be and how intense they will be. This Wednesday there will be some clues in this regard after the meeting in which rates will remain in the range of 5.25%-5.50%, the highest level since March 2001.
The Federal Reserve has not raised rates since July, but has managed to keep the market on edge with its repeated warnings that it is willing to raise rates if inflation does not ease to the 2% target. Although it is possible that Powell will reiterate that message this Wednesday, the market is beginning to believe that he is bluffing a bit. Keeping that option open allows you to dodge the question about downgrades.
“Most data since the November meeting point to moderation in activity, disinflation and a cooling labor market. It is likely that the Federal Reserve's confidence that its current monetary policy is appropriate and sufficiently restrictive has increased. In our opinion, the next policy measure will probably be a cut,” say economists at BofA Securities, who believe that a message from hawk It wouldn't be very credible at this point. “One of the main questions that the committee will consider is the intensity with which it wants to signal that it has adopted a relaxation bias,” they add.
Even before the president of the Federal Reserve appears at a press conference, the central bank will publish the forecasts of the members of the monetary policy committee on inflation, unemployment rate, economic growth and, above all, interest rates. Like every quarter, those responsible for monetary policy try to anticipate what they themselves are going to do, although they are often wrong.
The last mistake was made in September, when the majority expected an increase of 0.25 points more in the price of money before the end of the year, which has not finally arrived. The tightening of financial conditions due to the rise in long-term interest rates (which have now eased) did the dirty work for the Federal Reserve.
At that time, in addition, the thesis of higher rates for longer had been established in the market and the forecasts of the committee members indicated that the rates would be in the range of 5.00%-5.25% by the end of 2024. That implied a half-point cut during 2024. Today, the market will be awaiting both the updated forecasts and the message transmitted by Jerome Powell. Economists at Bank of America, for example, expect that the forecasts point to a cut of 0.75 points from the current level, which would leave them at the end of 2024 at 4.6%, that is, the range of 4 .50%-4.75%.
“Jay Powell will probably try to guide the market towards greater caution, in line with his latest public statements,” says Gilles Moëc, chief economist at Axa Investment Management. He believes the forecasts will tell the market that cuts are coming, but not as many as is currently discounted. “While a move in early spring, rather than June, our base case, is gaining plausibility, we don't see what the upside would be for the Fed to give a nod to current market prices while the economy “It remains strong enough to keep inflation risks alive,” he adds.
One of the problems with the forecasts is that they indicate where committee members believe rates will be at the end of next year, but not the steps by which they will reach that level. The market is divided on the timing of the first cut. Discarded on January 31, bets are spread between March 20, May 1 and June 12, the other dates on which there will be decisions on rates in the first half of next year.
In the press conference after the meeting on November 1, Powell tried to silence the debate on rate cuts and leave the door open to a hypothetical additional rise, even if it is not at this December meeting. “The idea that it would be difficult to raise again [una subida de tipos] after stopping for a meeting or two is not correct,” he first said. And then: The committee is not thinking about rate cuts right now at all. We are not talking about rate cuts. “We are still very focused on the first question, which is, have we achieved a monetary policy stance that is restrictive enough to reduce inflation to 2% over time in a sustainable way?”
The chairman of the Federal Reserve will avoid claiming victory too soon, especially while inflation remains above 3%. Powell wants to leave behind a soft landing, that is, controlling inflation without causing a full-blown recession. He has been with that goal for more than a year. Alan Greenspan achieved it in the last decade of the last century, but who Powell really admires is Paul Volcker, who managed to stabilize prices against all odds.
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