2023-12-13 04:09:07
Washington (AFP) – After more than a year of successive increases, the Federal Reserve (Fed) has decided to wait since the end of the summer, maintaining its rates as inflation slows, a trend that should further be confirmed at the end of this last meeting of the year, which concludes on Wednesday.
Certainly, inflation continues to slow down and is gradually approaching the target targeted by the Fed, set at 2% for the long term. The CPI index, published Tuesday just before the opening of the Monetary Policy Committee (FOMC) meeting, further confirmed this, with inflation now standing at 3.1% year-on-year in November.
Likewise, the PCE index, favored by the Fed, reached 3% in October, with underlying inflation (excluding food and energy prices) which also finally seems to be approaching the desired level.
All this in an economic context which remains very favorable, with good growth and an unemployment rate which is still very low but in a job market which is gradually relaxing.
“The employment situation still looks excellent and inflation is falling very quickly. And that’s exactly what we promised,” Chicago Fed President Austan Goolsbee recently praised.
The decision will be announced on Wednesday at 2:00 p.m. (7:00 p.m. GMT) in a press release published at the end of the FOMC meeting, which began Tuesday morning and will be followed by a press conference by Fed Chairman Jerome Powell.
The American Central Bank will take the opportunity to publish its economic forecasts in terms of inflation, unemployment and GDP growth.
From there to considering that the Fed’s bet, of a soft landing of inflation with minimal damage to the economy, is won, there is only one step.
That even the American president, Joe Biden, seemed to cross, breaking in the process the sacrosanct independence between the Fed and political power, by ruling on Friday that the economic data “did not encourage the Fed to raise its interest rates “.
Jerome Powell remains more cautious. Certainly the possibility of a further increase in rates does not seem to be envisaged but “it would be premature (…) to speculate on the moment when the policy could be relaxed”, he recalled, “this progress must continue if we want to reach our 2% target.
The 2% still far away
A sign that the Fed risks announcing that it will maintain its rates in the current range, between 5.25% and 5.50%.
At least this is the opinion shared by the vast majority of analysts, if we are to believe CME’s FedWatch tool: as of Tuesday evening, more than 98% of them expect rates to remain unchanged.
Because if the slowdown in inflation continues, it is happening at a slower pace, estimates Michael Pearce, chief economist for Oxford Economics, in a note, in particular because “underlying inflation still remains well above 2 %, which confirms the Fed’s statement that it wants more evidence” before releasing pressure on rates.
Even more, if inflation seems close to its target, the final step still seems very long, and “a return to 2% is very unlikely in the near future”, assures Oren Klachkin, economist for Nationwide, in a note.
The Fed “is not thinking of lowering rates for the moment”, he adds, “we anticipate the first reduction around mid-2024. By then the economy will be weaker and the objective of “inflation will be almost reached.”
Especially since, if the transmission of monetary tightening took longer than expected to reach the economy, the signs of slowdown seem to be increasing, after three first quarters where the American economy beat all expectations.
Household consumption slowed in October, while the reserves accumulated by Americans are now largely depleted and the rise in wages is showing signs of slowing down.
Even more, if unemployment remains very low, at 3.7%, 1.7 million people were receiving unemployment benefit at the end of November, the highest level since the end of 2021, a sign that the job market is relaxing and that it becomes more difficult to find a new job.
While waiting to know what trend will really prevail, the Fed will continue to exercise caution, even keeping the door to a potential increase open, judges Ian Shepherdson, chief economist for Pantheon Macroeconomics.
“We expect Chairman Powell to reiterate that the Fed always prepares for another hike if necessary, and he will certainly use the press conference to push back on the idea of a potential first cut,” predicts Mr. Shepherdson .
© 2023 AFP
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