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Rate Cuts: The Fed Is In No Hurry

Currently between 5.25% and 5.5%, US policy rates should not move until May at the earliest. A scenario that some investors find very difficult to do theirs.

By EC Invest

The Federal Reserve is in no hurry to lower its policy rates. If, at its last monetary policy meeting, it removed any reference to the possibility of further rate increases, Powell also pointed out that a decline as early as March is not the preferred scenario by the monetary policy committee and is, therefore, not the most likely outcome.

This has disappointed investors who, since the last months of 2023, have bet on a succession of six or seven key rate cuts in 2024. Such a scenario would have meant a sharp fall in the cost of credit, revitalising economic activity. The gamble of investors on such a scenario is at the origin of the rise of the American markets (both bonds and exchanges) over the same period.

But the Fed has always been more sceptical

Powell is only reinforcing the narrative that has characterised him for some time: the fall in inflationary pressures is in the right direction. It indicates that the Fed has done everything necessary to return the price trend to benign. As a result, it can offer itself a break, allowing it to observe the evolution of the real economy and better decide what to do next.

On the other hand, there is no reason to rush to lower policy rates in the short term, especially since the latest indicators show that the economy remains buoyant: the unemployment rate remains at shallow levels, the consumer is holding up, and the economy was still showing enviable dynamism in the fourth quarter of 2023, with annualised growth of 3.3%.


The reaction of the markets was not long in coming

From the historical highs of the previous days, equity markets experienced a slight decline. On the other hand, bond markets appreciated this Fed determined to go all the way in its fight against inflation. Interest rates have trended downward, synonymous with rising bond prices, with the 10-year rate falling below 4.0%.

Without claiming victory, the Fed is poised to succeed in a challenge that initially seemed very difficult: to bring the world’s largest economy to a smooth landing. By delaying its first rate cut by a few months – probably until May or even summer – it avoids succumbing to the market's enormous pressure, strengthening its credibility in the fight against inflation.

Bond investors will appreciate it. For equity investors, the calculation is more delicate: those who bet on euphoria in the short term will inevitably be disappointed. On the other hand, those who bet on the long term are well aware that, by being serious in its fight against inflation, the Fed is laying the groundwork for a new growth cycle. They will welcome this responsible approach.

We are part of it and continue investing in the United States in the bond and equity markets.

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