Why the Fed is ready for the first rate cut
Inflation expectations have fallen, yields have already fallen, but caution on next steps remains necessary
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2' min read
2' min read
Now it is the Fed's turn. The US Central Bank will start its interest rate cut phase at its September meeting: the Fed funds target, currently at 5.25-5.50 per cent, could drop to 5-5.25 per cent. Although President Jerome Powell will most likely confirm the strategy of 'meeting after meeting' decisions, this is the beginning of a normalisation cycle.
Waiting for the "dots"
.The September projections and the 'dots', with which the individual governors reveal their expectations for interest rates, will reveal how fast this phase of cuts can go. In June, the median of forecasts was one cut this year and four next year. Things may have changed, but it is quite likely that the reduction in the official cost of credit in the very short term may be very conservative.
Expectations down to 2%
The time is ripe. Long-term market expectations are in agreement about a return to the 2 per cent target, after a long phase in which they hovered at a somewhat higher level: the central bank's fear was that expectations would be anchored at higher levels than the target, with the very real risk of a restart of inflation. However, market measures are affected by different factors - including the risk premium and the liquidity premium - while survey-based measures, and related to a closer time horizon, continue to indicate overheated prices. The Michigan index, for example, was at 2.9 per cent in July, against Pce inflation at 2.5 per cent.
Braking intake
.Some caution is called for. However, the Fed has witnessed a slowdown in the pace of hiring in recent months - the number of employed continues to rise - which suggests less pressure on prices from wages.
Retributions still fast
.The caution is related to the fact that the increase in hourly wages is actually still rapid: 3.8% in August, albeit at the end of a slow and prolonged slowdown in wages. While an above-target increase, after the long price hike, is welcome - Americans feel, and indeed are, impoverished by high inflation - it is clear that the process is sustainable as long as higher labour costs are absorbed by lower profit margins (which increased in the first months of the price hike).
