The United States economy is at an inflection point where each piece of information allows for several readings. Inflation fell in the month of October to 3.2%, from 3.8% in September, which represents another step on the path towards price stability, according to the data made public this Tuesday by the Bureau of Labor Statistics. The decrease, however, was mainly due to the lower price of gasoline, so that core inflation, which does not include food or energy, remains very high and is still at 4.0%, in line with the 4 .1% in October and well above the inflation target of 2%. The figures, on the other hand, are slightly better than analysts’ forecasts.
Inflation has not been below 3% in the United States since March 2021. The recovery in demand after the pandemic with a very lax fiscal and monetary policy and the strangulation of the supply chain caused prices to rise. Supply problems were aggravated by the war in Ukraine, which boosted the price of oil, food and other raw materials. Inflation reached a maximum of 9.1% in June 2021, the highest in four decades, almost irreparably eroding the popularity of the president, Joe Biden.
Since then, it has fallen uninterruptedly for 12 months to 3.0% last June. The rise in gasoline caused prices to accelerate again in August and September. The final stretch to the 2% target is the most complicated for those responsible for monetary policy, who have been trying for more than a year to achieve the desired soft landing of the economy: controlling prices without suffering a recession throughout ruler.
Even so, the general impression that has taken over the market is that the economy has begun to slow down and that the Federal Reserve has already completed its interest rate increases. Its president, Jerome Powell, insists that he will not hesitate to raise the price of money beyond the 5.25%-5.50% range in which it has been since the summer if necessary, but the market believes which is a bit of a bluff.
So much so that analysts are now more focused on when and how much interest rates will fall in 2024 and there are some who have quite aggressive forecasts. Strategists at UBS Investment Bank predict that the Federal Reserve will lower interest rates next year by 275 basis points, almost four times more than markets expect. Not only that, but the continued decline in inflation will allow the central bank to begin aggressively easing policy as early as March. “Inflation is quickly normalizing,” says Bhanu Baweja of UBS in statements reported by Bloomberg. “By the time we get to March, the Fed will find itself with very high real rates,” he adds.
Morgan Stanley also foresees sharp cuts: in June 2024, then in September and at each meeting starting in the fourth quarter. Maybe they are selling the bear’s skin before hunting it. Goldman Sachs, in line with what the market is quoting, does not see the first rate cut for another year.
The very expectations of a softening of monetary policy go against their occurrence. A relaxation of financial conditions in the markets may cause the central bank to think twice before joining the party, just as its tightening has been, with a strong dollar and high bond rates in the secondary market. , which has allowed Powell to save some additional rate hikes.
The latest survey of fund managers by Bank of America shows that investors’ script for 2024 includes “soft landing, lower rates and weaker dollar.”
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