The US Federal Reserve increased its key interest rates by 0.25%, with the introductory interest rate between 5.0% and 5.25%. However, contrary to the speech adopted a little over a year ago, it no longer insists that further increases would be appropriate and signals at least a pause in this upward movement, which may well be permanent unless there is a nasty surprise on the inflation front.
A little more than a year after the beginning of the monetary tightening, here is the United States with the pivot anticipated by the markets. At this point, the news is pretty good. It would have been hard to imagine in early 2022 that policy rates could exceed 5% without plunging the economy into recession.
For now, the U.S. economy continues to grow and remain resilient. But, as we know, monetary policy takes some time. The impact of any change in key interest rates takes time to translate into changes in credit conditions, savings, investment and spending, and ultimately the real economy.
To reduce risks to growth, investors would like to see the Fed change course, reducing key rates later in the year — reducing investment risks is one of the investors' most significant concerns. Two key variables in investing are income and risk: if you take more risks, you can get more income. Our Money Framework goes deeper on that subject — for the Fed to justify key rate reduction, they point out the decline in inflation and the concerns of small American banks. After SVB, Signature Bank and First Republic PacWest are on the hot seat.
As a result, the banking system is under pressure, and credit conditions are experiencing a natural tightening, similar to Fed rate hikes. The most optimistic therefore bet on several cuts in key interest rates by the end of the year.
The only thing is, Jerome Powell and the Fed can’t hear it that way. They point out that inflation is still too high and only decreasing gradually and that an imminent fall in interest rates would not be appropriate. And since they don’t expect a recession in the US this year, they prefer to keep all options on the table, keeping their policy rates unchanged.
We expect small growth in the United States this year (0.5%) before a more vigorous 2024 year. Accordingly, we continue to buy U.S. stocks and bonds in our portfolio.