“A 25 basis point drop in interest rates is widely anticipated by the markets. If the Fed was not considering it, it would have already sent a message to investors to this effect,” said Mark Zandi, chief economist for Moody’s. The upcoming decision is in no doubt for investors, if we are to believe the CME FedWatch monitoring tool, while more than 95% of analysts surveyed anticipate such a drop on Wednesday.
The meeting of the Fed Monetary Policy Committee (FOMC) began on Tuesday morning, as is tradition, in Washington and the decision will be published on Wednesday at 7 p.m. GMT, before a press conference by the president of the institution Jerome Powell (7:30 p.m. GMT).
Acceleration of inflation
Inflation has accelerated again over the past two months in the United States, after following an encouraging trajectory towards the 2% target set by the Fed. The CPI consumer price index – on which pensions are indexed – rebounded in November to 2.7%. The PCE inflation index, which the Fed wants to reduce to 2%, will be published on December 20.
On the producer side, prices even climbed in November to their highest level in almost two years, notably due to the consequences of avian flu, according to the PPI index. “We can doubt the benefit of a further reduction (in interest rates) because the economy is doing well, it does not seem to need a stimulus,” underlined Nathan Sheets, economist for Citi.
“I think we will have a quarter of a point drop but that the Fed will also signal its desire to go more slowly in the future, if not to consider a pause, as long as it does not have an idea more precise understanding of the direction taken by the economy,” explains Mark Zandi.
Effects of Trump’s arrival
This last meeting of the year will be an opportunity for the Fed to publish its new forecasts, both on growth, inflation and unemployment and on the direction it expects to see its rates take. Jerome Powell recently estimated that the Fed “could afford to be a little more cautious” due to the strength of the economy. And one of the governors, Michelle Bowman, judged the risks linked to inflation “more significant” than those linked to unemployment.
The latter has also estimated on several occasions that the neutral rate, that is to say the one which has no influence, supporting or slowing down, on the economy, could be higher than initially anticipated, perhaps even close to the current level. But it will also depend on the economic policy put in place by President-elect Donald Trump, who will return to the White House from January 20.
However, between the promised deregulation in terms of standards, the desired expulsion of a portion of migrants who entered the territory illegally, the tax cuts or even the increase in customs duties, the effects on the economy could be major and are difficult to anticipate as they stand.
Supply or demand shock
Fed leaders “are not here to prejudge the effects of these policies, but they will have to take possible effects into account. This government’s proposals can cause a shock to both supply and demand and there are a range of possible consequences to these shocks,” Judge Nathan Sheets.
According to a survey of 500 American companies by the recruitment company Resume Templates, 82% of them plan to increase their prices if new customs duties are actually put in place. Donald Trump has already announced customs duties of 25% against his neighbors Canada and Mexico, which could push prices up for the American consumer.
