USD - JOLTS (Job Openings and Labor Turnover Summary)

Is the Fed really going to cut interest rates?

The interview given by the chairman of the Federal Reserve, Jerome Powell, on CBS's "60 Minutes" has fueled fears linked to a strong postponement of the first interest rate cuts by the US central bank.
Looking at the labor market data shared late last week, we see extraordinary resilience, which is perfectly reflected in the economic health of the United States.
This solidity, also confirmed by the press release issued on the occasion of the FOMC, is the main reason against rate cuts.
While the market is pricing in a strong postponement of the first cuts, many are wondering whether the current real interest rate is actually the neutral rate for the economy.
New fears arise following Powell's words.
The climate of distrust linked to the possibility that the Federal Reserve can keep the level of interest rates unchanged for a long period was fueled by the speech held by the president of the US central bank, Jerome Powell, during the interview on CBS's "60 Minutes." Although Powell spoke very positively about the central bank's work in combating inflation and bringing it closer to the 2% target, he stressed that the work is not yet done.
Speaking about cutting interest rates, he highlighted the risk of "acting too soon" and indicated that, at the Federal Open Market Committee (FOMC) meeting on March 19-20, it was unlikely that a level of sufficient confidence for a rate cut.
However, President Jerome Powell has not ruled out this possibility during 2024, appearing instead to be looking for the most appropriate time to implement it.
A Look at the Job Market Data shared late last week regarding the US job market serves as an important indicator for stock markets.
According to estimates from the US Department of Labor, there was an increase of 353 thousand new non-agricultural jobs, a figure higher than forecasts (consensus) and a maintenance of the old levels of the unemployment rate.
This undoubtedly represents a sign of strong resilience on the part of the labor market.
What is happening to the US economy? From the Fed's official statement, particular attention emerges regarding the inflation rate, which remains high despite the attenuation recorded in the last year.
This phenomenon is attributed to the strong strength of the US economy.
Based on these observations, the commission decided to keep the Fed rate level unchanged between 5.25% and 5.5%, while demonstrating a firm commitment to achieving the inflation target of 2% and the full employment level.
Analyzing the data, no particular imbalances emerge on interest rates, considering that inflationary expectations remain stable.
This could indicate that the current interest rate actually reflects a condition of neutrality, thus suggesting that the Fed sees no concrete reason to reduce it.
The real interest rate, adjusted for the Consumer Price Index (CPI), remains at its highest level in the last twenty years, and despite this, the economy continues to show a substantial absence of structural problems.
What is happening in the markets? While the stock market continues to post exceptional performances, the bond market has embarked on a new upward cycle in US Treasury yields, which has led to a decline in their prices.
This dynamic was highlighted by a marked appreciation of the US dollar.
This fully reflects the expectations of investors, who once again see good yields in US government bonds, thus shifting interest back towards the dollar.
This scenario seems more similar to that of the first half of 2023 rather than the second half of the previous year.
So does it make sense to expect cuts or not? Jerome Powell's recent statements mark a notable change of direction compared to the communication held during the FOMC at the end of 2023.
In less than a year, the market has interpreted three different scenarios: initially the concept of "higher for longer", followed by hypothesis of a «soft landing» which envisaged two rate cuts in 2024, with the first expected in the spring, and now the idea that the expected «soft landing» of the Fed could turn into a «non-landing» due to the robustness of the US economy, as suggested by the latest labor market data.
In addition, there was a divergence between the policies of the ECB, led by a more aggressive and determined Christine Lagarde in pursuing the central bank's objective, and those of the Fed, with Jerome Powell appearing more inclined to rate cuts.
Now, the two positions seem to have converged again, aligning more closely with the vision of the ECB president.
Although many market participants may interpret these developments as yet another bluff from central bankers, it is important to recognize that their statements appear to be based on a common basis: economic data.
Central banks' dependence on data makes it difficult to maintain linearity and consistency in declarations, generating uncertainty in the markets.

Author: A.W.M.

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