Fed keeps its rate at its highest level in 23 years

The United States Federal Reserve (Fed) chose to keep the reference rate unchanged for the fifth consecutive meeting, keeping it at the level of 5.25%-5.50% reached in July 2023.

The above, according to Sura Investments, was completely discounted by investors, and was also accompanied by the quarterly update of the institution’s economic projections for the North American economy, among which the increase in expected growth for the current year (2.1%), the downward correction in the unemployment rate (4.0%), and the upward adjustment in the expectation of core inflation (2.6%).

It is important to highlight that in the last two years the Federal Reserve has raised rates aggressively, reaching their highest level in 23 years, in an attempt to combat the highest inflation in decades.

The United States closed 2023 with a growth in its gross domestic product (GDP) of 3.1%, as indicated at the end of February by the Bureau of Economic Statistics (BEA, in English), thus leaving behind concerns about a recession.

Meanwhile, the consumer price index (CPI) rose to 3.2% in February on a year-on-year basis, while compared to the previous month it increased by 0.4%, above what analysts expected and very far from the 2% goal set by the Fed.

Market reaction

After the initial volatility during the press conference of Jerome Powell, president of the Fed, the reaction of the fixed income markets was positive but moderate, with the 2-year rate, highly sensitive to monetary policy, falling in the environment of 6 basis points, and the 10-year rate remaining relatively stable.

In Sura’s projection, expectations for the future path of rates did not show major variations either, although the probability of a 25 bp cut during the month of June increased slightly, once again exceeding 60%.

On the other hand, the confirmation that the Federal Reserve continues to project three rate cuts by the end of the year was well received by the equity markets, with the main US stock indices trading higher, with gains of between 0.76 % and 1.25%.

At the local level, the dollar closed lower again and stood at S/3.6940 this Wednesday, March 20, according to the Central Reserve Bank of Peru (BCRP). In this way, the dollar has recorded a decline of -2.25% in the last 12 months, and an accumulated variation of -0.35% so far in 2024, after closing 2023 at S/3.7070.

Meanwhile, the General Index of the Lima Stock Exchange (LSE), the most representative of the Lima market, had an advance of 1.48% during the day on Wednesday, March 20. In the month it advances by 5.30%.

What’s next for the Fed rate?

Sura, in line with market expectations and the Federal Reserve’s projections, anticipates rate cuts for the second half of the year, “understanding that the recent surprises in terms of inflation do not constitute a reacceleration in price variation, but rather They reflect the difficulty of reaching the last stage on the path to the 2.0% objective.

“In line with this, and with the strength that the global economy continues to show, we maintain our preference for variable income over fixed income,” the entity highlighted.