Bankinter: The Fed meets expectations and keeps interest rates (Fed Funds) at 5.25%/5.50%. With respect to the macro picture, it maintains the GDP forecasts for 2024, 2025 and 2026. However, it revises upwards both Inflation (PCE) and Underlying Inflation in 2025 and 2026 and continues to miss the 2% target until 2026. The Unemployment Rate is also revised slightly upwards in 2025, 2026 and in the longer term. With regard to the dot plot, the outlook for cuts in 2024 is moderated and points to only one rate cut (of -25bp) this year, compared with the three projected in the previous dot plot. On the other hand, in 2025 and 2026 they increase the outlook for cuts to -100bp each year (vs. -75bp previously in each year).
Analysis team’s view: Powell maintains a data-dependent approach and again says that decisions will be made on a meeting-by-meeting basis. They will take into account the data as a whole, but specifically need more than a single good inflation record to ensure that inflation is on track towards the target. The market impact is not significant, as the revision of the dot plot has been interpreted as a shift in the outlook for rate cuts from 2024 to 2025 and 2026. This is the result of the forecast of worse inflation figures in the second half of the year due to the base effect. After the meeting and Powell’s press conference, expectations have changed. The consensus expects a rate cut at the 7 November meeting and gives a 61% chance of a second cut at the 18 December meeting. Our estimate is somewhat more conservative and we believe that the Fed will make a single rate cut at the December meeting, giving the Fed more time to monitor inflation developments.
On the other hand, the US CPI surprises by declining in May: +3.3% year-on-year versus +3.4% expected and +3.4% previously. Month-on-month; +0.0% versus +0.1% expected and +0.3% previously. The Underlying Rate moderates to +3.4% versus +3.5% expected and +3.6% previously. Month-on-month rises +0.2% versus +0.3% expected and previously.
Our team’s view: Good news. Inflationary pressures are slowing down in both headline and core, although still above the 3% level. Market expectations for rate cuts are moving forward and we now expect almost two rate cuts this year, starting in November.
November.
