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Euphoria on Wall Street after the Fed aims to cut interest rates three times in 2024

Euphoria on Wall Street after the Fed aims to cut interest rates three times in 2024

Wall Street and the Nasdaq actually set new historic highs in the New York Stock Exchange session on Wednesday after North American Federal Reserve members forecast three cuts in the key interest rate by the end of the year. The new forecast map was published on Wednesday after the Fed's two-day meeting, in which it was unanimously decided to keep the reference rate in the range between 5.25% and 5.5%. Five meetings have been held since this rate has not changed.

Forecasts advanced this Wednesday by the Federal Reserve – the so-called A type of statistical graph, A dot chart reflecting the views of central bank members – Coincides with expectations in the Fed rate futures markets, according to odds indicated by the CME Fed Watch platform.

Markets and analysts reacted with relief, as they feared that Fed members would ease the cuts they expected in 2024. In fact, the majority in favor of the three cuts through the end of the year was casual. Of the 19 members, nine expect a maximum of two interest rate cuts.

However, it should be noted that these forecasts are only a reflection of the views of Fed members and do not anticipate any official guidance on how much and when interest rates could be cut. Fed Chairman Jerome Powell reiterated on Wednesday that decisions will be made meeting by meeting based on the data, a guideline similar to that followed by the European Central Bank.

Shrinkage process may contain “holes”

Markets fear that the majority in expectations of lowering interest rates will decline due to the rise in inflation in the United States in February slightly to 3.2%, after a slowdown of three-tenths in January.

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But the Fed Chairman emphasized in Wednesday's press conference that they “will not overreact or ignore” this increase in February. He reassured the markets by saying that the process of deceleration (slowing inflation) could have “holes at times” and decrease “gradually.” This does not change the possibility of a cycle of rate cuts starting “sometime this year,” once Fed members feel “confident” about the downward path of inflation. Jerome Powell stressed that due to the current “significant uncertainty”, we must “continue to pay attention to inflation risks.”

The Fed Chairman reiterated that the “message” was simple: “We need to see more [no processo de desinflação]He added: “It is appropriate to be cautious in dealing with the problem.”

The three cuts expected by the majority in 2024 will lead to a decline in the reference rate from the current range of 5.25% to 5.5% to 4.6% to 5.1%, in the average responses of meeting participants. A type of statistical graph.

Now, in addition to an occasional majority in forecasts in favor of three interest rate cuts in 2024, Fed members have raised the level of interest rates they expect for the end of 2025 and 2026. In other words, instead of the midpoint of 3.6% in 2025, which they expected last December, they now expect the interest rate to remain at 3.9% at the end of next year. For 2026, they expect the rate at the end of this year to remain at 3.1%, instead of the 2.9% they expected in December. The process of lowering interest rates will be slower, according to current expectations.

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In markets, the Fed's interest rate futures platform indicates a 68% probability of a first rate cut at the June 12 meeting, followed by further cuts on September 18 and November 7, according to data from CME's FedWatch. Depending on the markets, Fed interest rates are expected to end the year in a range between 4.5% and 4.75%, i.e. a cumulative cut of 75 basis points (three-quarters of a percentage point), equivalent to a rate of decline of 25 percentage points. -The basis of every meeting.

Optimism about GDP, and more pessimism about declining inflation

Frankly, Fed members seem more optimistic about the performance of the US economy. The forecast revises the GDP growth rate upward from 2024 to 2026. The United States will grow by 2.1% this year, instead of the 1.4% expected in December. In 2025 and 2026, it will grow by 2% each year instead of 1.8% and 1.9%, respectively.

However, regarding inflation, the forecast for 2025 has been revised upwards from 2.1% to 2.2%, which is a slight increase. Even more worrying is the fact that they revised their core inflation forecast (excluding the more volatile components of the CPI) for 2024 from 2.4% to 2.6%.

Slow down the balance sheet drawdown

The Fed is concerned about the impact on the debt market that a reduction in its bond portfolio will have. Therefore, he will discuss his “slowdown”. “The general idea is that it will be appropriate to slow the outflow rate” of portfolio bonds soon, Jerome Powell said.

By reducing the portfolio acquired from asset acquisition programs, the Fed is issuing securities to the market that it would otherwise have to absorb. By slowing this process down, “there is much less risk of liquidity problems that could generate shocks and bring the process to a premature halt,” Powell said.

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The Fed chief also said the bank wants to have a “cushion” on its balance sheet.

In the global debt report issued early last March, the Organization for Economic Cooperation and Development warned of the risk of “flooding” the market For commitments that the Federal Reserve and the European Central Bank will release in the near future.