Despite the rebound in inflation, the Fed keeps its rates unchanged and rules out an increase

Despite the rebound in inflation, the Fed keeps its rates unchanged and rules out an increase
Despite the rebound in inflation, the Fed keeps its rates unchanged and rules out an increase

The American Federal Reserve (Fed) on Wednesday kept its interest rates unchanged between 5.25 and 5.50%, a range within which they have been moving since July. In question: the “ lack of progress » recent on the inflation front, the Monetary Policy Committee (FOMC) specifying that “ in recent months there has been a lack of further progress towards the Committee’s target of 2% inflation “.

Since January in fact, when the trajectory of the price increase was on the right track to gradually reach the 2% objective, it started to rise again, to 2.7% over one year in March, according to the index PCE favored by the Fed, and at 3.5% according to the CPI index. A rebound that contrasts with Europe, where the clear slowdown in inflation is driving the European Central Bank (ECB) to consider a rate cut from June.

Wall Street on the rise

However, there is no question of increasing rates. During a press conference, the head of the Fed, Jerome Powell, ruled out the possibility of a future increase in interest rates. For him, he ist « unlikely that the next move on rates will be an increase “, and it will undoubtedly be necessary “ more time than expected » before having confidence in the fall in inflation.

Enough to reassure investors. Around 7:10 p.m. GMT, the Dow Jones rose 1.30% and the Nasdaq 1.46%. According to Jerome Powel, monetary policy is “sufficiently restrictive” over time. Ten-year bond rates eased to 4.61% instead of 4.68% the day before.

The Federal Reserve, however, is marking the beginning of an easing of monetary policy: it announced on Wednesday that it will reduce the volume of assets on its balance sheet more slowly from June. The Fed’s portfolio had grown during the pandemic, when it massively purchased securities, flooding the market with liquidity to keep the financial system functioning.

Then, alongside rate increases intended to fight inflation, it sold securities, reducing its portfolio by 1,500 billion dollars.

Manufacturing activity slows faster than expected

These announcements come as manufacturing activity in the United States slowed more than expected in April, contracting again under the combined effect of a drop in orders and employment, according to published data. Wednesday by the professional federation ISM.

The index measuring this activity stood at 49.2% over the past month, compared to 50.3% in March, which marked the first month of growth in activity after 16 consecutive months of contractions. It thus falls below the 50% mark, below which activity is in contraction. The index is also lower than the expectations of analysts, who anticipated a slight drop but an index in balance at just 50%, according to the consensus published by briefing.com.

“Demand is slowing slightly, which is reflected in a drop in orders, even if the companies surveyed show optimism in their comments,” detailed the head of the survey for ISM, Thimothy Fiore, quoted in the communicated.

Demand remains in the early stages of recovery, with continued signs of improving conditions. (…) Among the six main sectors contributing to industrial GDP in April, none has a PMI index below 45% “, he added. A PMI index below 45% is considered by professionals as a sign of weakness in activity in a sector.

The manufacturing industry has been suffering for almost two years from rate increases decided by the central bank – the Fed – to bring down high inflation. Making credit more expensive actually reduces demand. Especially since consumers were also constrained in their purchasing power by high prices.

Job creation above expectations

But the strength of the labor market allows rates to be maintained high. Private sector companies in the United States actually created more jobs than expected in April, but fewer than in March, a figure also published this Wednesday. In April, 192,000 private jobs were created, according to the monthly ADP/Stanford Lab survey published Wednesday. This marks a slowdown compared to March, a month for which job creations were revised upwards, to 208,000 instead of the 184,000 initially announced. Analysts were counting on 183,000, according to the Market Watch consensus.

“All sectors hired in April,” said Nela Richardson, chief economist at ADP, adding that “only the information sector – telecommunications, media and information technology – showed weakness, posting job losses and the lowest pace of wage increases since August 2021.”

As for the increase in wages, it remained stable compared to March for those who did not change jobs (+5% over one year), but fell to 9.3% (compared to 10.1% in March) for those who changed jobs.

The official employment figures for April in the United States will be published on Friday, a slowdown in job creation compared to March is expected, at 240,000, and the unemployment rate should remain stable at 3.8%, according to the Market Watch consensus.

Job creation had far exceeded expectations in March, and 303,000 jobs had been created, up compared to February. The unemployment rate had fallen slightly.

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