Last but not least, behind the recent price fireworks on the stock exchanges is the hope that interest rates will be cut soon. However, the American Federal Reserve is in no hurry to make such a change of direction.
Traders on the New York Stock Exchange will probably have to wait until the second quarter for the hoped-for interest rate turnaround.
John Angelillo / Imago
When visibility is blurred, standing still is often the best strategy. The American Federal Reserve Bank also says this. It therefore left the key interest rate unchanged in the range of 5.25 to 5.5 percent at the first meeting of the new year on Wednesday. The decision does not come as a surprise, especially since practically no one had expected an interest rate move in the run-up to the meeting. Nevertheless, the financial markets had great expectations associated with the monetary policy meeting.
Powell wants “more confidence”
The reason for the tension: Investors are waiting for indications as to when the Fed will end the tightening policy it began in March 2022 and order the first interest rate cuts. It is a given on the markets that such a change of course will take place this year. A month ago, Fed Chairman Jerome Powell also made similar hints. At the time, the Fed’s interest rate forecasts indicated that three interest rate cuts of 0.25 percentage points each could result in 2024.
In its latest decision, the Fed made it clear that it is in no hurry to cut interest rates. Unlike before, the monetary authorities no longer mention the possibility of interest rate increases. At the same time, the statement states that a reduction in key interest rates is not appropriate until there is “more confidence” that inflation is moving sustainably towards 2 percent. At the media conference, Powell referred to the good trend of the last six months, but emphasized that they wanted to see even more good data.
There are good reasons for Powell’s wait, which was met with price losses on the stock market. The data is currently ambiguous: inflation is moving in the right direction; Since peaking at over 9 percent in the summer of 2022, it has fallen to 3.4 percent compared to the previous year. However, the joy is clouded by the fact that prices rose more than expected in December. This shows that the return to the 2 percent target is by no means a straight path.
Experience has shown that the last mile on the path to price stability is the most difficult, even in the USA. The rising housing costs there are currently proving to be persistent. However, there is at least confidence in the fact that the core rate of the consumer price index has continued to fall. This core rate reflects the general price trend more reliably than overall inflation because very volatile components such as energy and food are excluded.
Interest rate cuts in March are off the table
Although the direction is correct, it remains unclear how much time it will take for the last mile. Both growth and the labor market are in solid shape in the USA and are not particularly impressed by the tightening of monetary policy. This resilience can be interpreted positively, especially since the scenario of a “soft landing” and thus the prevention of a recession in the USA is becoming more likely. But the economic strength is also causing problems for the Fed.
Because when the economy is booming – in the fourth quarter the economy grew at an annualized rate of 3.3 percent, stronger than expected – wages usually also rise. And with robust consumption, which accounts for two-thirds of the US economy, companies find it easier to pass on higher costs to consumers. Such second-round effects make the fight against inflation more difficult and suggest that interest rate cuts should be held off.
In the USA, economic growth has been above the long-term trend growth for six quarters. There is a correspondingly high risk of increasing inflation again with premature interest rate cuts. This danger was ignored on the markets until recently; Many investors were already expecting a rate cut in March. However, Powell made it clear on Wednesday that such an early date was unlikely and was not part of the base scenario. Investors will probably have to wait until the second quarter for the interest rate turnaround.
The key interest rate in the USA is higher than in the euro area and Switzerland
Key monetary policy interest rates in the United States, the euro area and Switzerland
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