United States: Fed still sees three rate cuts in 2024 despite strong inflation and economy – 03/20/2024 at 10:16 pm

By Howard Schneider and Ann Safir

The US Federal Reserve (Fed) kept its key rates unchanged for the fifth time in a row on Wednesday, indicating it plans to cut rates by up to three-quarters of a percentage point this year, despite more modest forecasts for a fall in inflation. .

Speaking after the publication of the American central bank’s press release, its president, Jerome Powell, emphasized at a press conference that the latest figures showing higher inflation did not change the underlying “narrative” of gradual easing of pressure on prices in the United States.

He added, however, that even the latest data did not boost the Fed’s confidence that the battle against inflation had been won.

In its monetary policy statement, the Fed presented inflation as still “elevated” and updated quarterly economic estimates that the personal consumption expenditures (PCE) price index, excluding food and energy, would eventually rise at a rate of 2.6%. The year compared to 2.4% in the estimate published in December.

That doesn’t stop 10 of 19 Fed officials from still predicting a key rate cut of at least 75 basis points by the end of 2024, an average forecast set at this level for the first time in December and maintained despite recent data showing. Higher than expected inflation.

On Wall Street, stock indexes held on to their early gains immediately after the Fed announcement.

The dollar depreciated 0.16% against a basket of currencies, while the ten-year-U.S. The yield on Treasuries fell about 1.5 basis points to 4.2827%.

The Dow Jones index rose 1.03% to 39,512.13 points and the Broader Standard & Poor’s 500 rose 0.89% to 5,224.62 points, while the Nasdaq Composite closed up 1.25% to 16,369.40 points.

“The May meeting is not favorable for cuts, barring a financial disaster, as the (Fed Monetary Policy) Committee continues to try to ensure that inflation returns to its target level before starting an easing cycle,” Michael Brown, head of analysis, said in a statement. . Markets at Pepperstone.

In December, 11 Fed officials had already forecast three quarter-percentage-point cuts for 2024.

The Fed’s new estimates, however, are accompanied by an upward revision of the outlook for the economy. Growth for this year is now expected at 2.1%, compared to just 1.4% forecast in December, while unemployment should be at 4% at the end of the year, down from the 4.1% expected in December and barely above the 3.9% unemployment rate reported in February.

High long term rate

The long-term policy rate, a key indicator, was raised by a tenth of a percentage point to 2.6% from 2.5%, reflecting the view of some Fed officials that the economy could face higher interest rates in the future.

The Fed began an aggressive cycle of monetary tightening two years ago in response to a surge in inflation that eventually climbed to a 40-year peak. Since last July, the American central bank has decided to keep its key rate in the 5.25%-5.50% range.

The Fed’s latest projections show the median outlook cuts the benchmark overnight interest rate by three-quarters of a percentage point in 2025, lower than last December’s forecast, and by three-quarters of a point in 2026, three months earlier than planned.

“Economic activity developed at a steady pace. Job creation remained substantial and the unemployment rate remained low,” the Fed wrote in its press release, which was approved unanimously.

The statement also reiterated that central bank officials are still waiting for “greater confidence” in the continued decline in inflation before making an initial cut in interest rates. This rhetoric was already used in the January 30-31 meeting and may be used again until the first reduction in borrowing costs.

In a note, analysts at Oddo BHF Suisse said they were not surprised by the Fed’s decisions, noting that disinflation was less strong than expected, the impact of restrictive monetary policy was less significant than expected and that, since the start of the year, investor expectations have aligned with the US central bank’s forecast. done

Oddo BHF says it expects Fed rate cuts of 25 basis points in June, September and December.

A gradual slowdown in inflation

During his press conference, Jerome Powell emphasized that despite unexpectedly strong inflation, the Fed’s view on price pressures remains relatively stable.

He said the latest inflation data “didn’t really change the overall situation, which is that inflation is slowly coming down on a somewhat rocky path.”

Jerome Powell also downplayed indicators that the labor market was struggling.

“The job market is in good shape,” he said. “I don’t see any cracks right now” in the labor market, which is recovering from severe imbalances since the start of the Covid-19 pandemic, he added.

“In many ways,” he noted, labor market conditions “are getting back more to where they were in 2019.”

Regarding the Fed’s balance sheet, Jerome Powell suggested that the day is fast approaching when the central bank will slow the pace of liquidation of its portfolio.

“It would be appropriate to slow the pace of liquidation soon,” he said, referring to the ongoing drawdown of the Fed’s bond holdings.

Jerome Powell emphasized that slowing the pace of these cuts from the current pace of just $100 billion per month would reduce the risk that the Fed goes too far and shakes money markets.

(With contributions by Howard Schneider and Ann Safir, Saqib Ahmed and Lindsay Dunsmuir; French version edited by Claude Chenjou, Jean Terzian)