2023-08-23 15:50:00
(Photo credits: Federal Reserve – )
By Mondher Bettaieb-Loriot, Head of Corporate Bonds, Vontobel
This year, we expect Fed Chairman Jerome Powell to point out that current central bank policy is tight enough to bring inflation back to its 2% target.
Indeed, as US inflation continues to decline, the nominal federal funds rate appears even more restrictive for the US economy. Powell and Williams, the president of the New York Fed, recently indicated that they would have to adjust rates downward to keep real interest rates constant in order to maintain the desired maximum level of restriction.
We could therefore be moving towards a restrictive long-term framework, in which the bank would implement rate cuts from 2024, as inflation continues to decelerate, until the economy returns to a core inflation of 2%. Once that level is reached, the bank could then consider taking real rates back to neutral, according to New York Fed President Williams.
Furthermore, the recent volatility in the US Treasury market, which pushed yields higher, was due to an increase in redemptions and the supply of bonds during a very illiquid summer period. The downgrade of the US credit rating by Fitch and the adjustment of the yield curve by the Bank of Japan are also among the factors pushing yields higher.
None of this changes our belief, we believe rates should be much lower by the end of June 2024 unless core inflation continues to fall, with GDP growing materially beyond that. Fed forecasts of 1 to 1.5% in 2024.
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