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The Fed: between excessive expectations and the path to normalization

The Fed: between excessive expectations and the path to normalization

The Federal Reserve believes it is applying appropriate restrictive measures to bring inflation to its 2% target over time, but recognizes that it needs to be more confident that we are moving in that direction before lowering rates. There were not many changes to the overall statement, except for some discussion about the lack of progress on inflation.

Reuters

As expected, the Federal Reserve leaned toward the “higher for longer” argument, recognizing clear evidence of a slowdown in inflation progress, but was careful not to let the market think the next move would be anything but a cut. The timing of that eventual cut remains the question and something Fed Chair Powell took pains to discuss at the news conference.

The markets have been receptive to the statement and the press conference, as many expected a more aggressive tone from the Federal Reserve, and even a mention of the word “hike”, given the recent series of inflationary data that we have seen in early 2024. It seems very clear that the Fed Committee’s March expectation of three cuts by 2024 was too aggressive, and the base case may be closer to zero or one cut.

The Federal Reserve believes it is applying appropriate restrictive measures to bring inflation to its 2% target over time, but recognizes that it needs to be more confident that we are moving in that direction before lowering rates. There were not many changes to the overall statement, except for some discussion about the lack of progress on inflation.

The limit on Treasury withdrawals from the balance sheet was reduced from $60 billion per month to $25 billion per month, more aggressive than many thought, as the Federal Reserve continues to withdraw funds from its balance sheet, but at lower global levels. It has been abundantly clear and acknowledged by the Fed that they have more work to do, but they continue to believe that inflation will resume its downward trajectory as the year progresses. It remains to be seen if time is enough to solve the riddle of inflation.

Janus Henderson’s fixed income teams generally continue to believe that policy is doing its job, albeit more slowly than the progress we saw in the second half of 2023. The normalization process towards its 2% target will clearly take longer than which many anticipated, but we believe patience is the right approach.

We are seeing signs of slowing economic growth, which could indicate that Federal Reserve cuts are slowly making their way through the economy and could negatively impact US macroeconomic data in the near term. At Janus Henderson we believe that whether it’s a longer rally or a momentum rally, investors should continue to take advantage of this decade’s high returns.

Director of Multi-Sector Credit Strategies at Janus Henderson Investors

Source: Ambito

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