Investors are awaiting clues from the Federal Reserve on when and how much they will cut interest rates on the economy

Investors and analysts assume that interest rates have peaked in the United States. Although Fed Chairman Jay Powell is trying to keep the possibility of a further turn of the screw alive, the question is no longer actually whether the price of money will rise further. What is being talked about now is when the declines will be and how severe they will be. This Wednesday there will be some clues in this regard after the meeting in which interest rates will remain in the range of 5.25%-5.50%, the highest level since March 2001.

The Fed has not raised interest rates since July, but it has managed to keep the market on edge with its repeated warnings that it is willing to raise interest rates if inflation does not ease back to the 2% target. Although it is possible that Powell will repeat this message on Wednesday, the market is starting to think that he is bluffing a little. Keeping this option open allows you to avoid the question about discounts.

“Most data since the November meeting point to moderating activity, slowing inflation and a cooling labor market. The Fed’s confidence that its current monetary policy is sufficiently appropriate and restrictive has likely increased. In our view, the next policy action is likely to be a cut. hawk It wouldn’t be very credible at this point. They add: “One of the key questions the committee will consider is the extent to which it wants to indicate that it has adopted a relaxation bias.”

Even before the Fed Chairman appears at a press conference, the central bank will publish the forecasts of Monetary Policy Committee members on inflation, the unemployment rate, economic growth and, above all, interest rates. As is the case every quarter, monetary policy officials try to predict what they will do themselves, although they are often wrong.

The last mistake occurred in September, when the majority expected an additional 0.25 point increase in the money price before the end of the year, which did not arrive. Tightening financial conditions as a result of rising long-term interest rates (which have now been eased) did the Fed’s dirty work.

At that time, in addition, the hypothesis of higher interest rates for a longer period had been established in the market and the panelists’ forecasts indicated that rates would be in the range of 5.00%-5.25% by the end of 2024. This implied a half-point reduction during 2024. Today, the market will wait for both the updated forecast and the message conveyed by Jerome Powell. Economists at Bank of America, for example, expect expectations to indicate a reduction of 0.75 points from the current level, which will leave it at the end of 2024 at 4.6%, that is, in the range of 4.50%-4.75. %.

“Jay Powell is likely trying to steer the market toward more caution, in line with his recent public statements,” says Jill Mueck, chief economist at AXA Investment Management. It is believed that expectations will indicate to the market that cuts are coming, but not to the extent currently reduced. “While a move in early spring, rather than June, our rule of thumb is gaining plausibility, we don’t see what upside the Fed could create if it gave a nod to current market rates while the economy remains strong enough to support… Economy”. “Keeping inflation risks alive,” he adds.

One problem with forecasts is that they indicate where committee members think interest rates will be at the end of next year, but not the steps by which they will get there. The market is divided over the timing of the first cut. Bets were canceled on January 31, spread between March 20, May 1 and June 12. Other dates when decisions on interest rates will be made in the first half of next year.

In the press conference following the November 1 meeting, Powell tried to silence discussion of interest rate cuts and leave the door open for a hypothetical additional hike, even if not at the next December meeting. “The idea that it would be difficult to bring up again [una subida de tipos] “After stopping for a meeting or two, this is not true,” he said first. And then: the committee is not considering cutting interest rates at all at the moment. We’re not talking about interest rate cuts. “We remain very focused on the first question, which is: Have we achieved a monetary policy stance that is sufficiently restrictive to bring inflation down to 2% over time in a sustainable way?”

The Fed Chairman will avoid declaring victory too early, especially since inflation remains above 3%. Powell wants to leave behind a soft landing, that is, controlling inflation without causing a full-blown recession. It has been for this purpose for over a year. Alan Greenspan achieved it in the last decade of the last century, but the man Powell really admires is Paul Volcker, who succeeded in stabilizing prices against all odds.

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