Investors expect Powell to give clues on when the Federal Reserve will start lowering rates

The soft landing of the US economy, with inflation losing steam without causing an appreciable deterioration in the labor market, marks the first meeting of the year of the Federal Reserve's monetary policy committee.

Investors and analysts hope that its president, Jerome Powell, will give some clue as to when the rate cuts that those responsible for the central bank themselves predict for this year will begin.

The market is divided on whether a first cut of 25 basis points (0.25 percentage points) will come at the March meeting.

What there is no doubt about is that the Fed will keep the price of money at 5.25%-5.50% this Wednesday, the highest in almost 23 years.

The focus will be on how Powell interprets the latest economic data.

The economy grew 0.8% quarterly and 3.1% year-on-year in the fourth quarter, showing surprising strength.

For the year as a whole, gross domestic product (GDP) increased 2.5%, according to the first estimate published last Thursday by the Office of Economic Analysis of the Department of Commerce.

Meanwhile, the Federal Reserve's preferred inflation indicator slowed to 2.9% in December, falling below 3% for the first time since early 2021, according to data published on Friday by the same organization.

All forecasts point to a cooling of the US economy in the year that has just begun.

Inflation remains above the price stability objective of 2%, but if the data for the last three or six months are annualized, the goal would have already been reached.

That is to say, everything is ready to start the rate cuts, but the question is when to start and at what pace to avoid a false step.

Political pressures

Although the president of the United States, Joe Biden, has been very respectful of the role that corresponds to the Federal Reserve in the fight against inflation, the political pressure from the Democrats for Powell to boost the economy at the beginning of a election year, have begun.

Massachusetts Sen. Elizabeth Warren and three other Democratic colleagues (John Hickenlooper of Colorado; Jacky Rosen of Nevada and Sheldon Whitehouse of Rhode Island) have urged Powell to lower rates to help reduce purchasing costs. living place.

“High interest rates have exacerbated the country’s persistent housing access and affordability crisis,” the senators wrote in a letter dated Jan. 28.

“As the Fed weighs its next steps in the new year, we urge it to consider the effects of its interest rate decisions on the housing market and to reverse the troubling rate hikes that have put affordable housing out of reach. too many people,” the letter adds.

Nothing indicates that Powell, appointed by Donald Trump and renewed in office by Joe Biden, is going to give in to political pressures.

“We don't think about politics.

We think about what is right for the economy,” he said at the December press conference.

In any case, the change of direction in monetary policy comes in the months before the elections and it will be difficult for Powell to avoid criticism in one sense or another.

Although every word the president of the Federal Reserve utters this Wednesday will be carefully analyzed, it is possible that he will adopt a wait-and-see position, referring to the evolution of the indicators.

At the same time, he can maneuver with the central bank's balance sheet, which is reducing after the expansion that served to confront the pandemic.

The Reserve can, for example, slow the pace of reduction of its assets.

The market is also very aware this week of the Treasury's debt issuance objectives and how they may affect long-term interest rates and, therefore, monetary conditions.

“If the Fed were to cut rates in March, it would signal it at the meeting, but we think the chances are slim because it would prefer to wait for additional evidence that nominal wage growth and underlying inflationary pressures are easing,” the analysts indicate. from Oxford Economics.

“Downside risks to the economy appear to be fading, reducing the risk of a scenario in which the Federal Reserve has to cut rates more quickly than expected to support the economy.

This argues in favor of a gradual pace later this year.

We anticipate that the Fed will lower rates once a quarter, starting in May,” they add.

For its part, Axa Investment Managers also forecasts a prudent relaxation of monetary policy, which would take rates to 4.75% from 5.50% at the end of the year, but with a first cut in June.

“We doubt that the Federal Reserve is comfortable enough that inflation is on track as long as growth remains solid,” says David Page, head of macroeconomic analysis at the manager.

Powell has insisted numerous times on the risk of claiming victory too soon and has recalled how Arthur Burns, chairman of the Federal Reserve in the 1970s, was tolerant of inflation and it became entrenched in the US economy for a decade.

It was Paul Volcker, of whom Powell declares himself an admirer, who insisted until the excessive price increases were subdued in the following decade.

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