The United States economy is at a turning point where every piece of information has multiple readings. Inflation fell from 3.8% in September to 3.2% in October, marking another step toward price stability, according to data released by the Bureau of Labor Statistics this Tuesday. However, the decline was mainly due to the lower price of gasoline, so core inflation, which does not include food or energy, remains very high, still at 4.0%, which is 4.0%. .1% in October and well above the 2% inflation target. The numbers, however, are slightly better than the analysts’ forecasts.
Inflation in the USA has not been below 3% since March 2021. The recovery in demand after the pandemic with very lax fiscal and monetary policies and the strangulation of the supply chain caused prices to rise. Supply problems were exacerbated by the war in Ukraine, which drove up prices for oil, food and other raw materials. Inflation peaked at 9.1% in June 2021, the highest in four decades, denting President Joe Biden’s popularity almost irreversibly.
Since then, it has fallen continuously for 12 months, reaching 3.0% last June. The rise in gasoline caused prices to rise again in August and September. The final step toward the 2 percent target is the most complicated for monetary policymakers as they have been trying for more than a year to achieve the economy’s desired soft landing: controlling prices without suffering a year-round recession .
Still, the general impression in the market is that the economy is starting to slow and the Federal Reserve has already completed its rate hikes. Its president, Jerome Powell, insists he will not hesitate to raise the price of money if necessary beyond the 5.25% to 5.50% range it has been in since the summer, but the market believes that this is a bit of a bluff.
So much so that analysts are now focusing more on when and how much interest rates will fall in 2024, and some have quite aggressive forecasts. Strategists at UBS Investment Bank expect the Federal Reserve to cut interest rates by 275 basis points next year, nearly four times more than markets expected. In addition, the continued decline in inflation will allow the central bank to begin aggressive monetary easing as early as March. “Inflation is normalizing quickly,” UBS’s Bhanu Baweja said in statements reported by Bloomberg. “By March, the Fed will be faced with very high real interest rates,” he adds.
Morgan Stanley also expects sharp cuts: in June 2024, then in September and at every meeting from the fourth quarter onwards. Maybe they sell the bear’s skin before hunting it. According to market quotations, Goldman Sachs does not expect the first interest rate cut for another year.
The mere expectation of an easing of monetary policy stands in the way of its occurrence. Easing financial conditions in markets could make the central bank think twice before joining the party, as could its tightening with a strong dollar and high bond yields in the secondary market, which has allowed Powell to save additionally Interest rate increases.
Bank of America’s latest survey of fund managers shows that investors’ scenario for 2024 includes “soft landing, lower interest rates and a weaker dollar.”
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