Newsflash on interest rates

To compensate for the growing inaccuracy of the Julian calendar, which had governed Western society since Julius Caesar, Pope Gregory XIII decreed in 1582 that 4 October would be followed by 15 October that year.  The pontiff’s decision sparked a revolt among the servants, who demanded payment of their wages for the whole month, which the masters refused.

We won’t go so far as to compare the increase in volatility on the bond markets since the start of the year to revolt movements, or Jerome Powell to Gregory XIII, but a change in the timetable, that of the anticipated cuts in the Fed’s key rates, is once again the main factor behind these not inconsiderable bouts of nervousness: 80 bps between the high and low points on the US 10-year Treasury, compared with 70 bps over the same period last year.

Between the six rate cuts expected for 2024 at the start of the year – an optimistic scenario that was largely based on Jerome Powell’s euphoric press conference on 13 December – and the two cuts – barely – deduced today from the Fed Funds market, the data-driven strategy advocated by the Fed has been derailed. It has come up against a wall of contradictory data, reflected in particular in the contrasting fall in core inflation (3.9% in January, 3.8% in February and March, 3.6% in April).

We have three points to make:

  • Point of market tension – the timetable for anticipated rate cuts, constructed from projected overnight rates at the various FOMC dates, is more comparable to a series of opinion polls than to a forecast timetable, which the market sometimes seems to forget. The difference is of the same order as that between breakeven inflation, which only represents the market’s idea of inflation at a given date, and actual inflation.
  • We have said on several occasions since the end of last year that, given the particularities of US inflation – joint inflation by supply (rise in corporate profit margins) and demand (rise in household disposable income) starting in 2021 – it would be difficult for the Fed to cut rates before the second half of 2024. We maintain our view. We believe that, of all the data closely or remotely related to inflation, the return of a downward trend in core inflation remains the central element that will enable the Fed to act. With this in mind, April’s figure is a step in the right direction.
  • We do not share the minority but much-debated view that the US central bank could raise rates again. This view seems to us to be based less on facts than on the same blind exaggeration that saw it cut rates 6 times in March.