The Fed seems not in a hurry to lower its key rates. This is understandable given the current economic climate, which includes a strong economy, still high inflation, and a healthy labour market.
According to the figures, US growth was 2.3% in the last quarter of 2024 (annualised figure) and 2.8% compared to 2023. For the whole of 2024, US growth was 2.8%, slightly down from the 2.9% recorded in 2023, but confirms the relative dynamism of the world’s leading economy.
This good performance is remarkable as it continues to be driven by household consumption spending, even though credit remains relatively expensive. The other driver is public expenditure, which is also growing at a steady pace.
There are several reasons for the resilience of the US consumer. On the one hand, a promising labour market and wages are rising faster than inflation. The disposable income of households grew by 2.6% in the fourth quarter. Secondly, housing prices are a significant factor in calculating inflation in the US.
All those who own a home and have a fixed-rate mortgage before the rate hike experience inflation below the national index. However, there are numerous since, in the United States, the fixed mortgage at 30 years is the reference in the sector.
Finally, we must not forget the wealth effect. With bond yields higher than in the past and stock markets in full swing, many Americans—large investors, unlike Europeans—are seeing their wealth grow substantially. This makes them feel confident. It is difficult to bet against the unyielding U.S. consumer in these conditions. We, therefore, remain invested in this country, both at the equity and bond levels.
The Fed in pause mode
The strong economy provides the Federal Reserve with a greater degree of flexibility. Donald Trump may demand cheaper credit in the US, but the Fed does not hear it that way. At its monetary policy meeting, the Fed kept its key rates unchanged at 4.25%—4.5%. The Fed pointed out that it is not in a hurry to lower them further.
Its decision seems logical. At 2.9%, annual inflation remains above its target. At the same time, the labour market remains tight in the US, with an unemployment rate of only 4.1%. Given the latest growth figures, the economy is, therefore, very well adapted to the high price of credit. With growth of around 2.8% and inflation close to 3%, the neutral rate for the US should be somewhere in the region of 5.75%. We are far from that; the US monetary policy can hardly be described as restrictive in absolute terms.
Caution is therefore required, primarily as the Fed also monitors Donald Trump’s two priorities. The imposition of customs duties, which will increase the prices of imported products and thus consumer prices as a whole, but also restrictions on immigration and expulsion of the homelessThe European Commission has published a report on the European Union’s work programme for the European Union.
Taken together, these factors are leading the Fed to be cautious about its monetary policy stance, and there is a strong likelihood that no downgrade will occur until it sees real progress on inflation.
Stabilising US policy rates is bad news for investors betting on a month-long credit, which could further accelerate consumption and investment. But at this stage, markets are well prepared for the fact that interest rate cuts may be reduced to a bare minimum in 2025 or even absent.
It is also bad news for many emerging countries that would like to lower their own key rates but are reluctant to do so because if the rate differential with respect to the StatesThe US is too small, investors may rush out. Finally, the high US interest rates help to explain the strength of the US dollar, which continues to trade at high levels against most other currencies.
The returns offered on US debt markets are currently attractive, whether it is government, corporate or high-yield debt. It is therefore very present in all our portfolios.