(Finance) – From hawk to dove in the blink of a wing. Powell surprised once again the markets, which they expected a more prudent attitude compared to future “obvious” interest rate cuts. And yet the Fed has some three reported starting in spring. “It’s too early to celebrate victory”Powell warned in the press conference, referring to a soft landing scenario with low inflation and an economy not in recession, and added “we are ready for further tightening if necessary”.
The President then admitted “the Fed believes interest rates are at their highest or near the maximum for this cycle” and that “the discussion on cuts is only just beginning”. And he added that the Fed is willing to cut rates even if the US economy does not fall into a recession in 2024, as “it could just be a sign that the economy is normalizing and does not need restrictive policies” .
“Overall, lThe development of the labor market has been very positive. It was a good time for workers to find jobs and get solid wage increases,” Powell recalled, noting that there is “job growth that is still strong, but that it is returning to more sustainable levels.” “The era of this frenzied labor shortage is behind us,” he added and “wages are still too high.”
“The decline in inflation without excessive unemployment is good news”, underlined Powell, warning however that i prices “remain too high” and therefore the Committee “will proceed with caution remaining ready for any eventuality.”
The FOMC yesterday he kept i firm interest rates for the third time in a row in an oscillation band between 5.25% and 5.50%but the Fed’s dot plot, or the graph that indicates bankers’ preferences, signaled the probability of three rises rates next yearfour more in 2025 and three in 2026. Board members also estimated that the policy rate should fall to a range between 4.5% and 4.75% next year, while the median rate is seen at 3.6% in 2025 and 2.9% in 2026.
The FOMC meeting this time precedes that of the ECB by one daywho today will have his say on the monetary policy of the Eurozone, with one big difference: the European economy will almost certainly fall into recession and the hypothesis of a soft landing is more remote. So what to expect from the Eurotower?
Most analysts expect the ECB to maintain a cautious attitude towards future rate cuts, as was thought for Powell, but this was not the case and the attitude seemed even bolder than expected.
“The ECB is likely to remain cautious about its next moves and highlight the factors it is monitoring, such as wage growth and base effects related to energy prices,” comments Franck Dixmier, Global CIO Fixed Income at Allianz Global Investors, adding “investor expectations of a rate cut as early as March appear excessive, and therefore the significant decline in long-term rates that has recently occurred remains fragile.”
“We remain skeptical that the ECB will cut rates as soon as the market is pricing,” says Konstantin Veit, Portfolio Manager at PIMCOrecalling that the market already expects six cuts next year starting from March, but “the outlook for underlying inflation remains uncertain”.