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The chances of an upcoming interest rate cut by the Fed are reduced

The chances of an upcoming interest rate cut by the Fed are reduced

The economic growth of USA In the first quarter it was below the estimates of the Federal Reserve from that country (Fed) on the economy’s long-term potential for the first time in almost two years, but signs of a slowdown were accompanied by a rapid inflation which, if maintained, would pose a particular dilemma to the central bank.

The officials of the Fed, during much of his battle against an advance of the inflation Driven by the pandemic, they said they thought a period of below-trend growth would be needed to really align pricing pressures.

The expansion rate The 1.6% growth rate recorded in the first quarter met that mark, after a period above the central bank’s median estimate of 1.8% non-inflationary potential.

But the prices remained rigid, and the price index of personal consumption expenditures increased in the first quarter at an annual rate of 3.4%, compared to the 2% objective set by the Federal Reserve.

At first, the investors and analysts gave more importance to the high number of inflation that the signs that the economy could be cooling, as expected by the Fed.

Whats Next?

Tool data FedWatch of the CME Group showed that the probability of an initial cut in interest rates of the Fed is decreasing across the board: the probabilities of a cut in June are less than 10%, those of one in September are around 58% and those of a second cut in December are below parity.

According to Oren Klachkin, economist Nationwide Financial Marketthere is reason to think that the 1.6% growth rate in the first quarter exaggerates any weakness in the economy, as imports and inventories are unlikely to remain a major drag throughout the year.

However, the inflation is not at a point where the Federal Reserve can be confident that the 2% target is within reach.” “A higher interest rate environment is likely to prevail for longer.”

How does it affect Uruguay?

Since last month, the possibility of starting the reduction in the reference rate – a scenario that in December Fed thought likely before the middle of this year – has been postponed both for the market and for the various officials who are part of the US central bank.

Last Monday it was known that the retail sales in the United States increased more than expected in March, thanks to a rise in income in online businesses, further proof that the economy ended the first quarter on solid ground.

Retail sales rose 0.7% last month, the Department of Commerce Census Bureau. This is three points above what investors had predicted.

The report followed news about the sharp rise in employment in March, and reinforced expectations that the Federal Reserve could delay cutting interest rates this year.

With this, the performance of the US treasury bonds The 10-year bond rose to its highest level since November due to fears that inflation would accelerate. This led investors to reassess their expectations for interest rate cuts this year and they now expect cuts of 41 basis points by the end of December, compared to the more than 160 basis points expected in January.

The price of Uruguayan assets in dollars is directly affected this year by the behavior of the Fed and its monetary policy. The yield curve of global bonds in dollars has been accompanying the movement of US benchmarks.

If this scenario of no cut by the Federal Reserve continues, instruments in pesos are negatively affected, since the consequent strengthening of the global dollar drags risk-free rates upward, that is, those not linked to emerging economies. like the Uruguay.

Source: Ambito

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