Powell’s last mile of a long journey

After peaking in the summer of 2022, inflation in the United States has fallen back sharply. Despite the fact that disinflation is now well underway, previous episodes in our series have highlighted the fact that the US economy has not yet returned to the softness of 2 % inflation:  The pace of core inflation is still higher than this target, and the decline stalled at the start of the year; in the labour market, job creation is still high and, after slowing significantly, wages are slow to return to a pace compatible with the central bank's objective; finally, the geopolitical tensions that are potential sources of price pressure have not disappeared.

However, the meeting of the Federal Open Market Committee (FOMC), which ended on March 20, lifts the veil on what the Federal Reserve will be doing in the months ahead. Almost two years to the day after initiating monetary tightening, it has taken another step towards lowering interest rates for the first time. After two years of a long and perilous journey, "navigating by the stars under cloudy skies” in the words of its Chairman himself, the Federal Reserve can indeed be satisfied with leaving behind the risk of recession... and even more so that of a lasting slippage in inflation. Of course, the risk of inflation being a little more persistent than hoped remains. But for those who fear that the last mile is the hardest, the Federal Reserve reminds us that the last mile is also... the closest to the finish line! If inflationary pressures do not intensify, it should begin its downward cycle next June.

Until the finishing line is crossed, the central bank will of course remain cautious (and "data dependent"). The FOMC knows that the episode ahead is likely to be quite different from the previous ones. The forthcoming monetary easing does not meet an urgent need to support activity, and with inflation still higher than the Federal Reserve would like, the interest rate cut this time should be gradual. The median forecast of the FOMC members is no different:  three cuts of 25 basis points in 2024 and three more in 2025. For the time being at least, the message seems to have been received: the day after the FOMC meeting, the markets estimate the probability of a 25 basis point rate cut in June at 70 % and expect rate cuts in line with those of the FOMC for 2024 and 2025!