Investors and analysts assume that interest rates in the USA have reached their peak. Although Federal Reserve Chairman Jay Powell is trying to keep alive the possibility of another turn of the screw, the reality is that the question is no longer whether the price of money will continue to rise. There is currently talk about when the declines will be and how severe they will be. This Wednesday there will be some indications in this regard, after the meeting where interest rates will remain in the range of 5.25% to 5.50%, the highest level since March 2001.
The Federal Reserve has not raised interest rates since July, but has managed to keep the market on tenterhooks with its repeated warnings that it is prepared to raise rates if inflation does not fall to the 2 percent target . While it's possible Powell will reiterate that message again this Wednesday, the market is starting to think he's bluffing a bit. If you leave this option open, you can avoid the question of downgrades.
“Most data since the November meeting has pointed to weakening 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 view, the next policy action is likely to be a cut,” point out economists at BofA Securities, who believe a hawkish message would not be very credible at this point. “One of the key questions the committee will address is the intensity with which it wants to signal that it is committed to an easing orientation,” they add.
Even before the President of the Federal Reserve appears at a press conference, the central bank will release the Monetary Policy Committee members' forecasts for inflation, unemployment, economic growth and, most importantly, interest rates. Like every quarter, those in charge of monetary policy try to predict what they themselves will do, although they are often wrong.
The last mistake was made in September, when the majority expected the price of money to rise by another 0.25 points before the end of the year, but this has not yet finally occurred. The tightening of financial conditions due to the rise in long-term interest rates (which have since fallen) did the dirty work for the Federal Reserve.
By this time, the thesis of higher interest rates for an extended period had also become established in the market and the committee members' forecasts suggested that interest rates would be in the range of 5.00% to 5.25% by the end of 2024, with a cut of one half point in 2024. Today the market will wait for both the updated forecasts and the message delivered by Jerome Powell. Economists at Bank of America, for example, say forecasts point to a 0.75 point decline from current levels, which would leave it at 4.6% at the end of 2024, in the range of 4.50% to 4 .75%.
“Jay Powell will likely try to push the market toward greater caution in line with his recent public statements,” said Gilles Moëc, chief economist at Axa Investment Management. He expects the forecasts will signal to the market that cuts are coming, but not as many as currently priced in. “While a move in early spring rather than June, our base case, is becoming more plausible, we do not see what benefits there would be for the Fed to agree to current market prices while the economy remains strong enough to keep inflation risks alive,” he adds.
One of the problems with the forecasts is that they indicate where committee members expect interest rates to be at the end of next year, but not the steps in which they will reach that level. The market is divided on the timing of the first cut. The bets discarded on January 31 will be spread over March 20, May 1 and June 12, the other dates on which decisions on tariffs will be made in the first half of next year.
In the post-meeting press conference on Nov. 1, Powell tried to silence debate over rate cuts and leave the door open for a hypothetical further hike, even if it doesn't happen at that December meeting. “The idea that it would be difficult to bring it back up [una subida de tipos] “After stopping for a meeting or two, that’s not right,” he initially said. And then: The committee is currently not thinking about cutting interest rates at all. We are not talking about cutting interest rates. “We are still very focused on the first question: Have we achieved a monetary policy stance that is tight enough to sustainably reduce inflation to 2% over time?”
The Federal Reserve Chair will avoid claiming victory too soon, especially while inflation remains above 3%. Powell wants to move on from a soft landing, meaning controlling inflation without triggering a full-blown recession. It has served this purpose for more than a year. Alan Greenspan did it in the last decade of the last century, but Powell really admires Paul Volcker, who managed to stabilize prices against all odds.
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