As expected, the US Federal Reserve reduced its policy rates at its September meeting. This widely anticipated decision marks a significant turning point: the pivot markets have been waiting for about twelve months and are finally here.
If all widely anticipated the decision, its magnitude was less. While the other major central banks have all been cautious, with rate cuts limited to 0.25%, the Fed has not hesitated to go further, with a first cut of 0.5% setting US rates at 4.75%-5.0%.
Investors could have seen such a magnitude in two ways: they could have said that the Fed’s 0.5% decline is because it realizes that the US economic situation is deteriorating rapidly and is trying to avoid a catastrophic landing. This would have increased investor anxiety and weighed on markets.
However, they could also have seen it as a sign that Jerome Powell and his colleagues are in control and are making such a massive cut precisely to avoid the worst.
Initially, they chose to trust the Fed. But doubt gradually settles, and the markets close in the next few days.
It is clear that the forecasts published at the same time by the US monetary authorities show that the time is not for euphoria: they expect an American growth of about 2.0% in 2024 but also every year until 2027.
Moderate economic activity, therefore, is far from being extraordinary. Inflation will return to its 2.0% target, but only in 2026. The labour market will improve very slightly. But above all, policy rates should fall to the 3.0-3.5% range next year and then stabilize around 3.0% beyond that. So these rates will come up fairly quickly to the level the Fed deems appropriate, higher than previously anticipated.
So, we can’t expect the extraordinary, strong financing conditions that marked the decade to 2022. This has not failed to impact US long-term rates, which fell from 3.6% before the Fed’s announcement to more than 3.7% after.
Taking advantage of the decline in the cost of credit, which will inevitably support activity, the US economy should remain on solid figures.
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