Investing.com – Tomorrow the US Central Bank will announce its decision on interest rates.
If until some time ago the easing of the monetary tightening was considered a done deal, the return of inflation in recent months has changed things and now the markets are starting to consider the risk that fewer cuts than expected will arrive in 2024, if not even Nobody. In this sense, the words of President Jerome Powell will have great importance: based on our Fed rate monitor tool, 74% of analysts are convinced that the American central bank will leave rates on hold at least until the September meeting. But, as always, the bankers have the final say. So, to clarify and understand what can be expected, Investing.com has collected the comments of analysts in view of the Fed meeting on May 1st.
Paul Diggle, Chief Economist at abrdn
Our baseline scenario calls for two Fed rate cuts this year, in September and December, as growth and inflation are expected to moderate slightly in the second half of the year. However, we take seriously the risk that there is no cut or that the next move is a hike. Indeed, we assign a cumulative probability of 35% to the “no landing” and “peak oil price” scenarios, in which monetary policy remains unchanged or even becomes more restrictive.
On the growth front, activity continues to be supported by strong consumer and business balance sheets, accommodative fiscal policy, high net migration flows and rising productivity. These tailwinds may weaken slightly over the course of 2024, so we believe growth will moderate. There are both risks of consistently above-trend growth or an increase in the growth trend, and downside risks of a more significant slowdown.
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On the inflation front, the CPI proved positive once again in March. As the year progresses it becomes increasingly difficult to attribute this strength to residual seasonality and other anomalies. We believe modest disinflation is still underway, given the slowdown in wage growth, and falling market rents indicate that housing inflation will eventually decline.
Therefore, core PCE is expected to fall to 2.5% year-over-year by the summer, but progress may stall over the rest of the year as base effects prove less helpful. However, there is a high historical probability that inflation will remain above target or rebound, which is why we take these risks seriously.
Returning to monetary policy, the CPI’s upward surprise indicates that the Fed is not yet seeing the progress needed to proceed with a rate cut next summer. We think the Fed will wait until at least September before cutting rates, and then proceed with a second rate cut in December. However, risks lean towards an even later start date should inflation fail to slow. Despite this reversal, Powell reiterated that monetary policy remains restrictive, posing a high but not insurmountable barrier to further tightening. A sharp surge in oil prices, driven by geopolitical risk, could be a trigger for a move to no cuts or even further hikes.”
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Erik Weisman, Chief Economist and Portfolio Manager by MFS IM
The key to the Fed’s policy is its sensitivity to interest rates.
In late 2018, the Fed only raised rates to 2.50%, which was enough to sharply slow the economy. In this rate cycle, however, the Fed has raised rates by 500 basis points, yet the economy continues to grow. This lends itself to a few explanations…
1. The economy is less sensitive to interest rates because fundamental conditions have changed. If so, the Fed may need to raise rates further.
2. The economy is still rate sensitive, but actual real rates are not as high and overall financial conditions are still favorable. Then, the Fed should gradually raise rates until monetary policy is sufficiently restrictive.
3. The economy is less rate sensitive now, but only because of the shock of the pandemic. If it was true, the Fed may simply need more time for current rates to take effect.
The bottom line is that the Fed finds itself in the unenviable position of having to figure all this out without a compass.
Michele Sansone, Country Manager of iBanFirst Italia
Inflation in the United States is skyrocketing and does not appear to be stopping its rise. The consumer price index hit 3.5% year-over-year in March, up from 3.2% in February and above the consensus of 3.4%. If we exclude volatility-related items, the situation is even worse. Inflation is at 3.8% year-on-year and as low as 0.4% month-on-month – an unusually high rate. In a normal situation, monthly inflation fluctuates between 0.1% and 0.2%. The reasons for this surge are to be found in an increase in prices in the tertiary sector, especially in the insurance sector (+22.2% on an annual basis), transport (+10.7%), automotive repairs (+8 .2%) and hospital care (+7.5%).
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This is not a structural phenomenon, but it is important enough to generate a delay in the expectation of a rate cut by the Federal Reserve (Fed). At the beginning of the year, the market expected 6-8 rate cuts starting in March. Now only two are planned, starting from September and the start of the cuts could even be postponed to December if inflation does not decrease significantly by the autumn. A rate cut starting in June is ruled out, along with the likely cuts by the European Central Bank (ECB), the Swiss National Bank and the Bank of Canada, unless there are very disappointing employment data – but the odds are limited. The Fed’s decision could be further influenced in the coming weeks by the surge in oil prices (close to $90 a barrel).
Public debt must also be considered alongside employment and inflation. Under the stable rate scenario, the cost of debt for the US federal government is expected to reach nearly 6% of GDP by the end of the year. A significant figure, which the market judges to be unsustainable in the long term. However, if the Fed cut rates by 150 basis points, it would result in a 33% reduction in interest spending, for example. A significant result, which the Fed will take into account, also considering the approaching presidential elections.
Gilles Moëc, AXA Group Chief Economist and Head of AXA IM Research
Among the numerous data published last week in the United States, the market mainly focused on the core inflation index, which came out higher than expected. As of last Friday, only one and a half Fed rate cuts were expected this year.
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The details of the PCE data did not lead to greater relief than the overall data: services inflation increased again, while that of manufactured goods returned to positive territory, on a three-month annualized basis, for the first time since June 2019. Last year. We expect Jay Powell to make it definitively clear this week that the Fed is in no position to cut rates anytime soon. However, we expect the US central bank to cut rates this year (twice, starting in September), based on the assumption that weaker-than-expected GDP for the first quarter – below potential growth for the first time in almost two years – indicates the start of a lasting slowdown that would help restart the disinflation process, especially given the tightening of overall financial conditions, with 10-year yields returning to levels not seen since last fall.
However, another dose of the policy “higher for longer” in the United States would have serious implications for the rest of the world. While a rate cut in June now appears to have enough consensus within the Governing Council, hawks could highlight the risk of fueling imported inflation in the Eurozone through currency devaluation if the ECB diverges too much from the Fed. week, the Bank of Italy’s Fabio Panetta made a solid argument in favor of decoupling, pointing to the overall tightening of financial conditions that a paused Fed would unleash for the rest of the world. We therefore analyzed in detail a document, which quantifies the effects of spillover of US monetary policy, to which Panetta referred in his speech. We share his view that a Central Bank’s optimal reaction to lower domestic inflation pressure and challenging demand dynamics should be to counter contagion from the United States by cutting interest rates.
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Finally, looking at the Bank of Japan, it is already facing strong pressure on the exchange rate, which has fallen below the levels that had triggered intervention in the currency market in 2022. However, the latest inflation data justify the approach Ueda’s caution towards the normalization of politics.
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