The Fed will cut rates, but probably not in March, warns Jerome Powell

Jerome Powell went on Wednesday evening beyond the letter of the press release that the United States central bank had just published. During the press conference which followed the meeting of the monetary committee, the head of the Federal Reserve dared to say explicitly what many of his colleagues on the monetary committee of the Federal Reserve have been implying for several days: yes, the central bank The American bank is preparing to reduce its key rate, although it is unlikely that it will do so on March 20, the date of its next regular meeting.

“I don't think it's likely that the committee will reach a level of confidence in time for the March 20 meeting,” said Jerome Powell in response to a question from a journalist. For several minutes he explained that the level of “confidence” in the effective and sustainable return to an average price increase rate of 2% had not yet been reached. The message is important because it feels like a promise. The Fed believes that it is not urgent to lower the fed funds rate today, because it knows that such a shift will commit it for several months.

This rate at which it lets banks lend each other very short-term liquidity has been set between 5.25 and 5.50% since July. It would be extremely troubling for the financial system if the central bank were caught on the wrong foot by a resumption of inflation, or even simply by a pause in disinflation to a still unacceptable level. Its medium-term objective remains a price increase of 2%. The Fed's press release on Wednesday evening eliminated the reference, still present in the mid-December press release, to the possibility of an increase in its key rate. The “open market” committee therefore has its finger on the trigger but it judges, not without reason, that it has the luxury of still waiting until May 1, the date of its third ordinary meeting of the year.

By going off script in the Monetary Committee's press release, Jerome Powell also wanted to correct traders who for weeks have been betting on a rate cut from March, and even on a continuation of the downward movement at each Fed meeting in 2024. He succeeded because in a few minutes, the futures markets absorbed the message. From more than 60% probability of a drop in the "fed funds" rate at the beginning of March, we have gone to 35%, according to the Fedwatch Tool indicator from the CME, a large American derivatives market. The Fed, by giving itself the time to act, only takes into account the fact that the fear of recession has subsided. All the recent signals given by the economy actually show that consumption is more solid than expected, that hiring is weakening but remains strong, that the labor shortage has not been resolved, and that prices are becoming reasonable again. By May 1, she expects further signs that inflation is under control. Measured over twelve months, the core of inflation, if we do not take into account energy prices and the prices of food products, returned to 2.9% at the end of 2023. On the other hand, measured over the six In recent months, this core has already fallen to 1.9%. “A few more months at this level, and we can say with confidence that our objective of returning to 2% has been achieved,” says Jerome Powell in substance. What’s still holding Jerome Powell and his colleagues back? The head of the Fed tried to explain it on Wednesday evening. The Fed's fear is that successful disinflation in goods will not be followed by sufficient disinflation in services. A large part of the drop in inflation comes from a better alignment of the supply of goods with demand. The fortunate fall in energy prices also contributed. The supply chain problems caused by the pandemic are being resolved, which is improving the supply of goods, while at the same time demand is less strong than at the end of confinement and is mainly shifting towards services. However, on the supply and demand side of services, the alignment still leaves something to be desired. Particularly in terms of housing. If, moreover, the job market showed worrying signs of deterioration, the Fed would be in greater pressure to reduce its key rate. But at the moment, this is not the case. Strong growth of 2.5% on an annual basis in the fourth quarter and the unemployment rate of 3.7% observed in December convinced Jerome Powell that he had room before pivoting towards interest rate cuts .