Carmignac: Commentary on Fed meeting

Carmignac: Commentary on Fed meeting

1 februari 2024

Fed
Fed dollar (kreatikar, Pixabay)

The goldilocks scenario is in full play. The US economy is running at 3% and the immaculate disinflation narrative appears validated.

The pace of disinflation is hastier than expected – the combination of immigration flows and bottlenecks easing have helped on the supply side of the equation and deflation in China has helped on the demand side.

Core PCE and wages are at levels in line with the Fed’s 2% target, meaning all signals are turning green for it to start adopting a more dovish policy if needs be, as current policy rates are far above the neutral level of interest rates.

Powell will likely want to avoid becoming too much of a market mover. The Fed is lowering the probability of a March cut. Instead, he’ll stick to the data dependency plan. Two inflation prints are still expected prior the next 'live' meeting of March, along with two Non-Farm Payrolls publications.

Further down the year, questions will arise over how far and fast the Fed can go with rate cuts. Changes in labour supply dynamics, with immigration becoming an electoral issue, the impact of geopolitics on commodities, the potential for more substantial Chinese support measures and lower rates inherently feed into easier financial conditions, which in turn, feed into both economic growth and inflation. But for now, the soft landing of the US economy is a reality most had discarded.

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