Fed: The first step is always the hardest

By Volker Schmidt, Portfolio Manager at Ethenea

We do not expect a rate cut at the next Fed meeting on 11th and 12th June!

After three rate cuts by the end of the year had been hinted at by the Fed members in the March dot plot and markets had priced in up to four moves, the stickiness of inflation has come as a cold shower. The inflation rate has not fallen as quickly as expected in recent months, leading to a cautious stance on the future path of interest rates.

Last week, however, there were more positive signals from the inflation front: the Fed’s preferred PCE inflation came in at 2.7%, as expected, giving Fed officials some confidence in the path of inflation. At the same time, inflation was revised down slightly in the GDP report for the first quarter of 2024.

However, the housing and services components of inflation remained a source of concern. It is precisely these components that have led to very cautious statements from Fed members regarding the future path of interest rates. The central bankers were almost unanimous in wanting to gain “more confidence” that inflation was on a sustained downward trend.

At the same time, more attention has recently been paid to the Fed’s second mandate, full employment. GDP growth in the first quarter of 2024 was surprisingly low, at 1.3%, compared with 3.4% in the previous quarter. There were also signs of an incipient slowdown in the US labour market. A confirmation of both trends could give the Fed the desired confidence that the monetary tightening has had sufficient effect.

It is very fitting that both the so-called dot plot and the Summary of Economic Projections are published at the June meeting. These will present the current macroeconomic assessment and views on the future path of interest rates. With no rate cuts expected, investors are focusing on these projections. We expect the dot plot to show fewer rate cuts between now and the end of the year. Accordingly, we expect one or two rate cuts by the end of the year, provided there is no unexpected and rapid slowdown in the US economy.

Volker Schmidt
Volker Schmidt

Media contact

Wim Heirbaut

Senior PR Consultant, Befirm

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About Ethenea

ETHENEA offers a wide range of attractive investment opportunities for different investor profiles: risk-minimised, balanced and equity-focused.

Capital preservation and the achievement of stable long-term returns are key components of the investment philosophy of the Ethna Funds. The fund management consistently realises this objective through active management and flexible asset allocation across various sectors and asset classes.

ETHENEA wants to make a contribution and offer responsible and sustainable investment solutions. Therefore, ESG criteria are an important part of the investment processes of all Ethna Funds (Article 8 SFDR).

Further information and legal information can be found at ethenea.com.

 

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