Journalist: What can we expect from the FED meeting? The central bank has already acknowledged that it will lower interest rates in 2024. The most recent data is reassuring. Activity is developing healthy and inflation is converging towards the 2% target. There is no conflict between the two. Why is no one discounting a reduction now, but in March?
Gordon Gekko: With the information available, Jerome Powell and his people will prefer to watch and wait. Maintain the flow of events. Not to intervene yet, although they could do so now if they saw a more hindered economy. A rate cut in March is debatable. For now, it’s a coin toss. Only by May does it seem to establish itself as the favorite alternative.
Q: 2023 closed with all the shine. The economy growing at 3.3% and the GDP deflator advancing just 1.5%. Governor Waller said, a quarter before, that we were in the best of all worlds but that believing it was a danger. However, the national accounts do not retract it, they confirm it. Is that just it?
GG: There is no point in fighting with statistics. There are reasons to think that January began on the same path, but recharged. And the information comes from other sources, independent of those used to estimate the progress of GDP.
Q: This makes it less likely that it is a measurement error.
GG: As it is. According to the PMI report, activity increased in January at the most vigorous pace in the last seven months. With a notable jump compared to the end of 2023. Services leads, the manufacturing industry declines slightly. However, new business orders are also increasing for the industry. The demand that companies face is very firm and is getting stronger.
Q.: In that context, one could also doubt the need to prune rates, right?
GG: And why not upload them? The economy is at full employment, it grew 2.5% last year versus 1.8% which would be its potential limit, and the novelty is that it is picking up pace.
Q: You are right. Could we be surprised by having to increase rates one more step before we can reduce them?
GG: The other side of the equation is that inflation also surprises favorably. It doesn’t put pressure, rather it removes it. According to the PMI, inflation pressures cooled in January. Considerably. Inputs became more expensive at a monthly rate that is the second slowest since October 2020. The economy resists, pushes vigorously. Inflation drops one change and does not budge.
Q: It is the best of all worlds, the GDP tells us. It is the best of all worlds, the PMI report tells us. It must be like this, then.
GG: Employment is growing, but with less and less haste. It is not easy to find labor, especially qualified ones. All of the increase in employment since February 2020, when the pandemic hit us, is from foreign-born workers. Relaxing immigration obstacles was a success by President Biden that no voter will recognize. Outside of this point, we do not face any miracles. And there is no reason to think that we are deceived by a statistical mirage.
Q: Productivity should be flying as you expected.
GG: Even more than what is already detected in the records. The pandemic forced unprecedented digitalization. Sooner or later, one would expect a significant retribution.
Q: What should the FED do? You don’t have to raise rates because the economy grows quickly if inflation converges to the 2% target, but why should you lower them?
GG: Today, you can watch and wait. And that’s what he’s been doing since July. When something disturbs her, she can speak and get the markets to resolve her doubts for her. The reason for the lower rates is prevention. It’s not because of the aggregate data, it’s the devil in the details. What happens with credit? The defaults, the corporate defaults, the growing weight of the interest bill for the indebted. It’s because of the microphone.
Q: If you look at the debt spreads, nothing serious happens. The demand for corporate paper is enormous, and companies are placing piece-rate bonds.
GG: Sensitivity decreased. The demand like this is a double-edged sword. Does the spread fall because credit quality improved? Or because the FED is going to lower rates and I want to position myself? When it comes to watching and waiting, these types of issues are what Powell needs to see precisely.