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Rate cut in the US: the Fed is still not sure and the wait could be long

Rate cut in the US: the Fed is still not sure and the wait could be long
Rate cut in the US: the Fed is still not sure and the wait could be long

At the end of last year, after a significant drop in inflation, some analysts predicted that there would up to six or seven rate cuts by the end of 2024. Although most of them still expect some decline in the next quarter, The truth is that the outlook is uncertain. So much so that some analysts even believe that it is likely that there will be no new developments in this regard this year.

And inflation in the US remains around to 3.4%, while the labor market remains robust, as demonstrated by the latest employment data released last Friday, which was higher than expected. However, the unemployment rate increased slightly and reached 4% for the first time in 18 months, but that level is still considered full employment.

The economic data that worries the Fed

The key data was that the economy added 272,000 jobs, which exceeded expectations and likely delayed the possibility of a rate cut by the Fed. It happens that the body in charge of Jerome Powell It has a double task: to control inflation and to keep the labor market at bay at the same time.

That is why the strong employment data they were not a good news for investors, who hope that the upcoming rate cuts will boost the New York stock market. So any dovish comments from Powell will be very welcome, while a hawkish stance could cause stress in the market.

However, even with interest rates at very high levels, the S&P 500 is up more than 12% so far this year. And, in that sense, Pedro Moreyradirector at Guardian Capitalcomments in dialogue with Ambit than a US economy with high rates and for longer, the so-called “higher for longer“It does not have to be a destructive scenario, since you can continue taking advantage of the good performance of the treasuries and T-Bills considered”risk free“.

In the meeting, which ends this afternoon, Powell is expected to give indications about possible cuts in the future, “following in the footsteps of Canada and the European Central Bank (ECB), which have already begun to implement theirs,” says Moreyra. “The latter is important, because the ECB had not made a rate cut since September 2019“.

Will the Fed cut rates this year?

This Wednesday, new inflation data is also known in the United States and it is likely that the Fed will announce on the day that will keep interest rates unchanged. In this context, the tool FedWatch suggests that the chances of a cut by September fell to almost 49%at least 25 points from last week’s 59.5%.

Moreyra analyzes that the Fed’s decision would be to maintain the interest rate at 5.5% and together with the updated forecasts on inflation, economic activity and monetary policy, lhe markets will be able to obtain clues about when the long-awaited cut will arrivebecause in the meantime, inflation is expected to remain stable, but still far from the 2% objective.

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At the end of last year, after a significant drop in inflation, some analysts predicted there would be as many as six or seven rate cuts by the end of 2024.

Reuters

Actually, market consensus suggests September Fed meeting is first realistic chance for a cutbut there is a problem: that is six weeks before the general election, which suggests that the Fed is trying to stimulate the economy before Americans go to the polls, thus benefiting the sitting president, Joe Biden.

Sebastian AzumendiInternational Sales Trading Adcap, he thinks that “The market gives zero possibilities of changes in the rate both for Wednesday’s meeting and also for the next one on July 31“and agrees that the first cut would only arrive in September.

For Azumendi, The market will be more expectant of the corresponding inflation data for May, as it is expected to be 0.1% month over month. “A data in line or lower than expected can be a good signal for the future prospects of changes in the Fed rate” and adds that: “the good inflation number can imply lower American rates, directly benefiting emerging markets.” “. Although anticipates that Argentina will be more aware of what happens in Congress than in the American data this Wednesday.

Elections, interest rates and the risk of Trump’s economic plan

Pablo ReppetoHead of Research at Aurum Values, raises several doubts that the Fed “can lower rates as long as inflation and labor market data do not change significantly.” And, as he explains well, disinflation has not advanced and the labor market remains solid. Thus, the risks of a failed rate cut are high for Powellconsidering its erroneous assessment on the 2021/2022 transitory inflation“.

Reppeto also remembers that several voices are warning about “lThe inflationary risks of the economic agenda of (Donald) Trump, who has great possibilities of being president again“. What the strategist is referring to is that Larry Summers stated that the Republican leader’s policies, “such as increased tariffs on imports and restrictions on immigration“, could increase inflation and affect the workforce in sectors such as construction, generating wage pressures.

“Summers also warns that Trump could try to reduce the independence of the Federal Reservewhich could impact the agency’s decisions in the short term, especially if they lower rates prematurely and then have to raise them due to Trump’s policies, facilitating a conflict with the Fed,” warns Reppeto.

Meanwhile, Moreyra adds to the analysis that Trump’s vision of always prioritizing American productsand in this way be more pprotectionist, It results in a scheme that can be considered inflationary, in line with Reppeto. Added to this is the desire of the Republican candidate and which he has expressed on several occasions “to lower the Fed’s rates, which would go against Powell’s contractionary monetary policy” to solve the “inflation problem” caused by the COVID-19 pandemic.

Source: Ambito

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