United States monetary policy is at a turning point. The Federal Reserve believes it has already raised interest rates as much as it needed to control inflation. This Wednesday it kept rates at 5.25%-5.5%, its highest in almost 23 years, which it set in July. Now the time to lower rates is approaching. The president of the central bank, Jerome Powell, has begun to prepare the ground for this, but has also asked for patience. The monetary policy committee does not have enough confidence that the battle against inflation has been won. “The committee does not expect it to be appropriate to reduce the target range [de tipos de interés] until it has gained greater confidence that inflation is moving sustainably toward 2%,” Powell said, repeating the message of the statement issued shortly before by the Federal Reserve.
“We believe that our official interest rate has probably reached its maximum level in this tightening cycle,” Powell explicitly admitted in the press conference after the meeting. “And if the economy evolves as expected, it will probably be appropriate to consider reducing it at some point this year. But the economy has surprised forecasters in many ways since the pandemic and ongoing progress towards our 2% inflation target is uncertain, and we remain very vigilant about inflation risks,” he noted. “We are willing to maintain the current target range for the federal funds rate for longer if it is appropriate,” the president of the Federal Reserve has warned.
“As labor market tensions ease and progress on inflation continues, the risks to achieving our employment and inflation goals become balanced,” Powell explained. “We know that reducing monetary policy too soon or too much could result in a reversal of the progress made on inflation and ultimately require even more restrictive policy to return inflation to 2%. At the same time, reducing policy or diverting it too late or too little could unduly weaken economic activity in employment,” he added.
Comparing the Federal Reserve's statements after each monetary policy meeting with each other has always been one of the favorite sports of analysts and investors. When the central bank is at an inflection point, the focus on changes of a few words is exacerbated. This Wednesday, not a few words have changed, but the message has fundamentally changed by expressly referring to the possibility of a decrease, although warning that it will not come until there is greater confidence that inflation is advancing sustainably towards 2 %.
That the Federal Reserve believes rates will drop this year is no secret. The forecasts of the committee members themselves, updated in December, pointed to a reduction of 0.75 points this year until the end of the year. The question is when and at what pace. The bets were divided. The market gave a chance that a first cut would arrive in March, but after Powell's warning this Wednesday, that possibility fades. Most analysts are inclined to expect quarterly reductions of 0.25 points starting in the second quarter, starting at the May or June meeting.
“The economy has made good progress toward the objectives of our dual mandate,” Powell said, referring to his goals of achieving maximum possible employment with price stability. “Inflation has declined from its peaks without a significant increase in unemployment. “It is very good news”, he conceded, but then underlined that “inflation remains too high”, that “the ongoing progress to reduce it is not assured” and that “the path forward is uncertain”.
The economy grew 0.8% quarterly and 3.1% year-on-year in the fourth quarter, showing surprising strength. For the year as a whole, gross domestic product (GDP) increased 2.5%, according to the first estimate published last Thursday by the Bureau of Economic Analysis of the Department of Commerce. Meanwhile, the Federal Reserve's preferred inflation gauge slowed to 2.9% in December, falling below 3% for the first time since early 2021. according to data published on Friday by the same organization.
In the last two years, the price of money has risen by just over five points, the most aggressive tightening of monetary policy since the 1980s, precisely to counteract the highest inflation in four decades. The central bank hasn't moved rates since July last year, but Powell has managed to keep the tension on. On many occasions he has pointed out that even more important than the maximum level that the price of money reaches in this cycle of tightening monetary policy is how long high rates are maintained.
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Avalanche of Treasury issues
The United States Treasury updated its estimates this Wednesday of new debt issues and the conclusion is that an avalanche of new paper will hit the market in the coming months. The first appointment is next week. The Treasury plans to place 121,000 million dollars in debt to meet a maturity of about 105,100 million on February 15, so that it will achieve net financing of about 15,900 million dollars. The Treasury will issue three auctions, on February 6, 7 and 8, three-year bonds for $54 billion, 10-year bonds for $42 billion and 30-year bonds for $25 billion.
There has also been an increase in emission targets for the months of February, March and April. The Treasury plans to increase the size of 2- and 5-year auctions by $3 billion per month, 3-year auctions by $2 billion per month, and 7-year auctions by $1 billion per month. As a result, the 2-, 3-, 5-, and 7-year auction sizes will increase by $9,000, $6,000, $9,000, and $3 billion, respectively, by the end of April 2024, it has been announced. The United States has been increasing its debt as a result of the federal deficit, which stood at 1.7 trillion dollars last year.
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