For the United States, 2024 will be a year of lower interest rates. This is what at least the members of the Federal Reserve's monetary policy committee believe, who this Wednesday updated their forecasts for next year. There are different opinions about the intensity that this relaxation of monetary policy will have, but the median suggests that the reduction will be 0.75 points until the end of the year, from the level of 5.25%-5.50%, in that the central bank has maintained the price of money in its last meeting this year, as was assumed. It is the highest level in almost 23 years.
The median forecast indicates that rates will be at the end of 2024 at the level of 4.625% (the equivalent of a range from 4.5% to 4.75%), to be cut again in 2025 by one point to 3.625%. (band from 3.5% to 3.75%) and in 2026, 0.75 points more, to 2.875% (central point of the range from 2.75% to 3%), according to data published by the Federal Reserve this Wednesday.
These forecasts have a qualified value because those who formulate them are basically the ones who have to make the decision, they do not compromise their actions and they frequently deviate from reality. If the cuts were 0.25 points, there is no additional increase beforehand and that forecast is met, there would be three decreases over the next year.
Maximum in the Stock Market
The president of the Federal Reserve, Jerome Powell, has not wanted to completely close the door to an additional increase in interest rates if necessary, but the general feeling is that the last upward movement of this cycle was that of July. “When we started, the first question is how fast to move, and we moved very fast. The second question is how much to raise the official interest rate and that is the question we continue with,” he said, but admitting: “We believe that we are probably at or close to the maximum rate for this cycle.” The stock markets have reacted strongly to the rise and the Dow Jones index has closed at a new all-time high of 37,090 points after rising 1.4% in the session.
Powell explained that the committee members “do not see it likely that it is appropriate to raise interest rates further, but they do not want to rule out that possibility either.” That is, they do not completely rule them out in case the fight against inflation becomes complicated.
What the forecasts indicate is the expected level at the end of each year, so there are not many clues about when the first cut will occur. Powell, however, has made clear that he does not want to come too late because it could jeopardize the economy. “We are aware of the risk that we will hold out for too long,” he said. “We know it is a risk, and we are very focused on not making that mistake,” he added.
In the last two years, the price of money has risen five points, the most aggressive tightening of monetary policy since the 1980s, precisely to counteract the highest inflation in four decades.
Now it is the turn of the first reduction in four years. The last time the central bank lowered rates was in March 2020, following the economic collapse caused by the pandemic, when it placed the federal funds rate between 0% and 0.25%. The market is divided on the timing of the first cut of the new cycle. 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.
Without singing victory
In the previous forecasts, published in September, committee members anticipated one more rate hike before the end of this year, which ultimately did not occur. From that level, they expected a reduction of half a point in 2024, until leaving rates at 5.00%-5.25% at the end of next year, so now a considerably greater relaxation is expected, which the markets They have already been discounting.
Powell has repeatedly warned about the risk of claiming victory too soon in the battle against inflation, which peaked at 9.1% in June 2022 and has since fallen almost continuously to 3.2%. of November. Although progress is evident, inflation is still clearly above the 2% target. Core inflation, excluding the price of energy and food, is at 4%, so there is still work to be done. “No one is declaring victory. That would be premature,” Powell said.
At the same time, the tightening of monetary policy has not yet had its full effects on the economy. Analysts agree that growth is slowing in this fourth quarter and believe that, despite all the resistance it has shown, the weakening of the economy will continue in 2024, without a recession being ruled out. Powell himself does not dare to rule it out, although his goal is that soft landing outlined in the forecasts of the Federal Reserve advisors. “Inflation continues to fall, the labor market continues to regain balance and, for now, everything is going well,” he said.
These forecasts point to a growth in gross domestic product (GDP) of 1.4% in 2024; 1.8%, in 2025, and 1.9% in 2026. Given this weak growth next year, the unemployment rate would rise to 4.1%, to remain there at the end of 2025 and 2026. Inflation, In this almost idyllic scenario, it would drop to 2.4% in 2024; to 2.1% in 2025 and 2% in 2026. Time will tell how accurate these forecasts are.
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