U.S. Federal Reserve Signals Multiple Cuts in 2024 and 2025
The Federal Open Market Committee announced its intention to retain the benchmark rate within the 5.25% to 5.5% range. However, the committee surprised the market with plans for three rate cuts in 2024 and an additional four cuts in 2025. This dovish stance on monetary policy sent risk assets soaring, leading to record highs for the Dow and a decline in bond yields.
Despite the Fed’s commitment to rate cuts, it fell short of market expectations. Nevertheless, the Dow experienced considerable gains, and bond yields reached their lowest levels since July, with the 10-year U.S. Treasury yield dropping below 4% for the first time in months. U.S. headline inflation for November stood at 3.1%, above the Fed’s target of 2% but significantly lower than the peak during the pandemic. The core inflation figure, which excludes volatile food and energy prices, remained steady at 4%. Meanwhile, the U.S. economy maintained its resilience, with GDP growing by 5.2% in the third quarter.
Shift in Expectations for Rate Cuts
Fed Chair Jerome Powell’s remarks during the press conference expressed the possibility of rate cuts becoming a reality. As a result, economists and major lenders adjusted their predictions accordingly. Barclays economists increased their rate cut projection, now expecting three cuts at every other meeting starting from June, compared to their previous prediction of just a single cut in December 2024.
Barclays economists expressed surprise at the Fed’s lack of resistance towards the recent easing of financial conditions. They noted that the statement issued by the Fed acknowledged “tighter financial and credit conditions” compared to November. The summary of economic projections also revealed a slightly downgraded GDP growth projection for 2024, despite less restrictive conditions for aggregate demand. Despite the dovish shift, Barclays economists viewed the recent easing in financial conditions as a potential catalyst for growth that could stall disinflation.
Bank of England Projects Restrictive Monetary Policy
Unlike the U.S. Federal Reserve, the Bank of England opted to maintain its main interest rate at 5.25%. In contrast to anticipated rate cuts, the Bank stated that monetary policy is likely to remain restrictive for an extended period. Although U.K. headline inflation dropped to 4.6% in October, its lowest point in two years, it still exceeded the Bank’s 2% target. Wage growth, while below expectations, remained high at over 7%, posing a concern for the central bank. Despite tighter monetary policy impacting the real economy, the Bank of England’s Monetary Policy Committee acknowledged that key indicators of U.K. inflation persistence remain elevated.
S&P Global noted the challenge faced by the Bank of England in determining the appropriate timing for loosening its policies, especially given its previous hesitation in tackling high inflation rates. Principal Economist Raj Badiani highlighted the 6-3 voting pattern among the committee members, with three dissenting members favoring another 25 basis point hike. This indicates that the MPC is not yet ready to consider rate cuts due to persistent service inflation, which has placed regular earnings growth on a “troublesome trajectory.”
European Central Bank Moderates inflation
The European Central Bank remained cautious in its language, stating that policy rates would be set at sufficiently restrictive levels for as long as necessary. However, it shifted its outlook on inflation from a prediction that it would “remain too high for too long” to an assertion that inflation would decline gradually in the coming year. Year-on-year inflation in the euro zone dropped from 10.6% in October 2022 to 2.4% in the most recent reading in November, bringing it closer to the ECB’s 2% target. Despite this improvement, officials warned of potential wage pressures and energy market volatility that could lead to a resurgence in inflation.