US Federal Reserve Hints at Potential Rate Cut

1 février 2024

The United States central bank has taken a step towards a possible rate cut, creating anticipation in the financial markets. However, the prospect of lower borrowing costs in the largest global economy is viewed as being farther down the road. In its first meeting of 2024, the Federal Reserve kept the core interest rate range steady between 5.25-5.5%. The accompanying statement revealed a departure from its longstanding reference to potential further hikes in borrowing costs.

The Federal Reserve's statement indicated a shift in the balance of risks related to achieving employment and inflation goals, signaling an inclination towards a rate cut. Despite raising expectations for imminent interest rate cuts, the central bank emphasized the need for more evidence to ensure that easing inflation is sustainable. Fed Chair Jay Powell, in a news conference, expressed confidence but stressed the importance of gaining greater assurance that cooling inflation is a genuine signal.

Market expectations for the first rate cut underwent a notable shift, with the majority now anticipating it in May rather than March. The Federal Reserve's tightening cycle, initiated in March 2022 amid rising price pressures following Russia's invasion of Ukraine, has seen inflation peak at a 40-year high. However, the headline rate has subsequently declined more rapidly than in Europe.

Following the Fed's statement, US stocks experienced a decline, while the dollar strengthened against several currencies (excluding the pound). This could be attributed to expectations that the Bank of England will adopt a more conservative approach to potential rate cuts. In the UK, rate-setters are expected to maintain the Bank rate at 5.25%, the level held since August of the previous year.

While inflation in the UK has eased from its peak above 11% in 2022, it remains more persistent than in the United States, hovering above 4%, double the Bank of England's 2% target rate. Policymakers, including Governor Andrew Bailey, have consistently emphasized that it is premature to consider rate cuts. Financial markets currently anticipate four reductions in 2024, starting in May.

The Bank of England's perspective will be unveiled in the minutes of the Monetary Policy Committee (MPC) meeting and the accompanying Monetary Policy Report. Governor Andrew Bailey will provide insights in a news conference following the release of this information. The MPC's voting dynamics will offer the first indication of any potential shift from the current 'hold' stance, with three members supporting a rate increase in December while the remaining six favored no change.