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Rates will remain stable. Still. The March meeting of the Federal Reserve will not end with the cut in the official cost of credit expected until recently. Fed funds rates will remain at 5.25%-5.50%, the level decided last July. Attention will be paid rather to the indications on the future trend of rates (the “dots” with which they are graphically shown), and to the new quarterly macroeconomic forecasts.
Core inflation still high
There is not yet the confidence needed to start a new phase of monetary policy. The risk of “cutting” too early – the research is clear, from this point of view – is greater than that of cutting too late and the American economy is doing very well at the moment. It is inflation that is slow to return to target and the possibility that it will stabilize at a level above 2% is real. The Fed’s preferred index, the PCE, currently shows an annual increase of 2.4%, but the core – which excludes food and energy – is still at 2.85%. Even the other indicators are not entirely reassuring: the services sector, where prices fall more slowly, is at 3.9% while the change in the Atlanta Fed’s sticky prices still points to 4.4%. . The progress of inflation “is not guaranteed”, President Jerome Powell explained in a congressional hearing at the beginning of the month.
Mixed signals from short-term expectations
ONE-YEAR INFLATION EXPECTATIONS
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Long-term expectations (5y5y inflation swap rate, 5 and 10 year break even) have stabilized at an even slightly lower level – 2.3% the average from 2023 to today – than that which prevailed before the great recession – 2.4% between 2004 and 2007 – but one-year expectations give conflicting signals. The Cleveland Fed index now shows a reassuring 2%, while the University of Michigan index, even if the public data is stuck in January, still indicates 2.9%.
Wages still overheated
HOURLY WAGES STILL IN PROGRESS
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However, the expectations relevant to monetary policy are above all those that are embodied in wage demands. The job market remains brilliant in the United States and it is not easy to understand how much of it is linked to overheating – also generated by a fiscal policy that remains generous – and how much of it is instead linked to so-called structural factors. The increase in wages is 4.3%. For Central Banks, a recovery in purchasing power is welcome – as long as it takes place at the expense of profit margins – which helps families and reduces the impact of inflation on income distribution (which monetary policy cannot address). However, a continuation of this trend could lead to a new overheating of prices.
New jobs slightly up
NEW HIRINGS
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The level of hiring gives unclear signals. It has reached the pre-pandemic average, but has shown in recent months – and also in the moving average which slightly reduces the fluctuations of the historical series – a very slight upward trend.