Reality is stubborn, and little by little it is convincing the markets, and also the Federal Reserve itself, that rates will not be able to be lowered at the rate expected this year, with the consequences that this may have for consumers. investors. The latest employment data is good proof of this: the publication of a stronger-than-expected situation in US employment has ended up convincing the markets that the Fed will only be able to lower rates once in 2025, with a caliber of 25 basis points, and that, If there are more rate cuts, something will have to change in the situation of the world’s leading economy.
In the first days of January it was already clear that investors had serious doubts about the Federal Reserve’s rate reduction process. Interest rate derivatives markets have priced in between two and a rate cut in 2025, but were clearly leaning towards a double cut. This, in fact, is the scenario that the Fed maintains today as its official guide, as published in the last meeting last year when publishing its famous graph dot plot.
However, with the employment data that was published this Friday, confirming the strength of employment in the first economy on the planet, something has changed in the prospects of investors, and they have quickly readjusted their expectations of seeing rate cuts, leaving in a single decline the expected movement for the Fed this year. Now the markets are pricing in a rate cut in May or June, and stability in the rest of the meetings that the Federal Reserve will hold throughout the year.
The Fed, focused on employment
The latest employment data published in the United States is of special relevance for the Fed, due to the approach that the central bank has taken to determine its monetary policy. The mandate of the body chaired by Jerome Powell is twofold: price stability and achieving full employment, and in the summer of 2024 the president of the Fed recognized that the central bank’s focus had shifted, leaving aside the fight against inflation, to focus on trying to maintain the good health of employment.
Inflation showed signs of converging towards the 2% objective, but there were certain indicators, at that time, that made them more concerned about employment than about price stability. With this in mind, Powell highlighted that the central bank would be especially focused on employment data. Hence, the data that has confirmed the strength of the American economy on that front has been so important in moving expectations of seeing rate cuts in the coming months.
From now on, the evolution of employment data will be key to seeing at what pace the Fed will continue to lower rates in the coming quarters. In fact, if there were new positive surprises on the employment front, and these are combined with new inflationary surges, perhaps driven by the economic measures that Donald Trump has presented, it cannot be ruled out that the rate cut could be completely erased. in 2025, or even, as some analysts have ventured in recent weeks, it cannot be ruled out that the Fed may even consider having to raise rates at some point. Time, but above all, the data, will tell.
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