FED begins new meeting without room to lower rates due to high inflation

The members of the Federal Open Market Committee of the Federal Reserve (FED) American begin their March meeting this Tuesday, in which, as the institution had warned, no changes are expected, due to the persistence of the high inflation.

In their last meeting, which took place on January 30 and 31, it was decided to maintain interest rates at the current range of 5.25% and 5.5%, their highest level since 2001, and it was announced that if the economy evolves positively There will be drops this year, although not in this new event that concludes on Wednesday.

At this time it has been made public that the consumer price index (CPI) It 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% objective set by the FED.

For Steven Bell, chief economist at asset manager EMEA – Columbia Threadneedle, “slightly stronger US inflation in the first months of this year is not surprising given the strength of the economy at the end of 2023.”

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

But in Bell’s opinion, the inflation data “has curbed expectations of rate cuts.” Although in his opinion the pessimism in this regard “is exaggerated,” this rise in prices could cause the Fed to adopt “a line of caution.”

Axa Investment Managers, which manages some €840 billion in assets, agrees that the level of conviction regarding a short-term decline has been falling: “Last Friday the market valued the probability of cuts in June at only slightly above 50%, compared to more than 80% just a few weeks ago.”

It is possible, in his opinion, that the data of the inflation take longer than expected to demonstrate “beyond all reasonable doubt that full convergence towards the FED’s objective is materializing.”

On March 6, in its Beige Book of economic outlook, the Federal Reserve predicted that there will be “less restrictive financial conditions” in the coming months, an indication that interest rates could fall before the end of the year.

According to Axa Investment Managers, however, the market is beginning to be concerned by the feeling that its “window of opportunity” is “limited.”

If there are no cuts before June, or even July, there could be no cuts at all in 2024. “The logic is that if the economy is still too strong at the end of spring to justify a rate cut, it may be rational to wait until there is a clear signal on fiscal policy after the (November) election to gauge the monetary response”, point.

For Ebury, a fintech specialized in international payments and currency exchange, the FED is still “at least a couple of meetings away from lowering rates.” The macroeconomic data available so far, he emphasizes, has been “rather mixed,” and Fed members will want to see “more evidence of a downward trend in inflation (…) before committing to cuts.”

But the US Treasury Secretary, Janet Yellenwarned this month that the decline in inflation may not be “smooth”: “I wouldn’t expect it to be an easy path month to month, although the trend is clearly favorable,” he said on Fox News.

Ostrum AM, manager of the Natixis Investment Managers group, concludes that this March meeting “may be an opportunity to adjust the guidelines on the balance sheet reduction policy and confirm the prospects for lower rates.”