At its September meeting, the US Federal Reserve left its policy rates unchanged, with the main one between 5.25% and 5.5%.
At 3.7% in August, US inflation fell sharply against the more than 9% reached in 2022 and remains below interest rates on the entire yield curve in the United States. Interest rates are, therefore, favourable in real terms, allowing the Fed to take this pause while waiting to see more clearly the impact of the rate increases already agreed on on economic indicators.
But at the same time, the Fed reports that the soft landing of the economy is at hand. It foresees an economy that will finally be better than expected in 2023 and 2024 and reviews the growth forecasts for these two years, but also the figures for the job market, which will remain buoyant.
So, the American economy will do well, forcing the Fed to adjust its monetary policy forecasts.
First, by pointing out that a further increase in key interest rates is expected in 2023 since most participants in the monetary policy committee consider it necessary. As a result, all indications are that US policy rates will end the year higher than the current one.
Secondly, since the economy will remain dynamic in 2024 and 2025, the long-awaited decline in key interest rates will not happen anytime soon. The Fed expects policy rates of around 5% in 2024 and 4% in 2025. They will remain high for a long time, a sign of a somewhat restrictive policy and a relatively expensive credit, which will not likely please investors.
They are having difficulty believing that the Fed will stick to these projections and continue to bet on a faster-than-expected decline in interest rates. But despite this, equity markets have generally moved downwards while bond yields have priced in the opposite direction. This is particularly true for the shortest maturities, with the two-year bond rate rising rapidly from 5.0% to around 5.2%.
The high yields offered in the United States for a prolonged period are fraught with implications for global finance.
First, they will continue to support the greenback against all currencies that adopt less restrictive policies.
Then, the emerging world will have more difficulty attracting the capital it needs to finance itself and ensure its development. Beware of those whose governance will not convince investors!
The expression is that the US dollar is the currency of the United States, but the problem of the rest of the world may return often in the coming quarters.
For our part, we believe that this market has enormous potential. We continue to invest in it, both in equities and in bonds.