By Murat Aslan
ISTANBUL (AA) - Pricing in the money markets point to a possibility that the Fed may cut its policy rate after its 23-year peak to combat inflation in the fourth quarter, though the cautious statements from Fed officials and US macroeconomic data cause uncertainties to continue.
As the world’s central banks struggle with inflation, what the Fed has in mind is not yet clear, despite the signs of a cooling in the country’s economy.
Data showing that the US labor market remains tight is the main driver narrowing the Fed’s policy space, and the possibility of a soft landing in the economy supports the arguments that there will be no rush to start cutting rates.
The US unemployment rate is still close to its historic lows, currently at 3.9%, while the Consumer Price Index (CPI) climbed 3.4% in April, and it continues to be above the Fed’s 2% target.
Meanwhile, the US gross domestic product (GDP) climbed 1.3% in the first quarter, according to data released in the country last week, therefore, the lowest growth since the second quarter of 2022 was recorded, as per the preliminary GDP published in April, while the country’s economy was projected to grow 1.6% in the first quarter of 2024.
The core personal consumption expenditures (PCE) index, excluding food and energy items, climbed 0.2% month-on-month in April, below expectations, and by 2.8% year-on-year, in line with estimates.
In March, the core PCE index increased 0.3% month-on-month, and 2.8% on an annual basis.
Despite the softening depicted in the data, the impact of the Fed’s hawkish decisions to fight inflation has yet to be at the desired level, analysts say.
- Estimates show Q4 to be most probable time for 1st rate cut
Fed officials continue to discuss the possible risks of premature policy rate cuts as inflation has yet to slow down at the desired pace, and while the situation supports the estimates that the Fed may introduce its first rate cut in the fourth quarter, it is also expected to keep its rates unchanged at the meetings in June and July.
Additionally, it is uncertain whether the policy rate will be cut at the September meeting, as the pricing in the markets shows that 60% of estimates expect the policy rate to be cut, while the remaining 40% expect it to be left unchanged.
As for the November meeting, estimates show that 87% of estimates believe that the Fed will go for the first rate cut, and 57% of participants expect that the policy rate will be left unchanged in December after the possible cut in November.
The US employment data to be released on Friday is estimated to influence these expectations, especially the signals from the non-farm payrolls data, which will be closely monitored.
- Fed officials maintain cautious stance on rate cuts
The US macroeconomic data continues to indicate inflationary pressures to be effective still, leading Fed officials to maintain their cautious stance on rate cuts.
Neel Kashkari, president of the Minneapolis Fed, stated that the rates should remain steady for an extended period, as lowering borrowing costs before inflation is brought under control would risk the country’s prosperity, though he had said that he would not rule out the possibility of further rate hikes if price pressure goes up again in a previous statement.
Raphael Bostic, Atlanta Fed president, said that further rate hikes would not be needed to bring the inflation down to the 2% target, as the outlook is that inflation will fall very slowly, emphasizing that the Fed should adopt a restrictive stance.
John Williams, president of the New York Fed, noted that he expects inflation to continue falling in the second half of the year, and that high borrowing costs are constraining the economy, but although inflation is still very high, the Fed’s policy is well positioned, and the imbalances between supply and demand are easing.
- Signals to be taken from non-farm employment data to influence asset prices
Signals from US macroeconomic data, a cautious stance of Fed officials, and uncertainties over the bank’s policies cause asset prices to move in a limited margin, as the US 10-year bond has been moving in the 4.35% to 4.75% range for a while, and the US Dollar index has been hovering between 104.2 to 105.2 levels since May 15.
The ounce price of gold has traded for between $2,280 and $2,430 since April 5.
Analysts noted that the signals to be taken especially from the non-farm employment data will influence the direction of asset prices.
*Writing by Emir Yildirim