a life after the Fed?

Wall Street is consolidating heavily for the time being, before trading on Thursday, the DJIA losing 1.5% and the S&P 500 1.9%. Yesterday evening, the markets reacted strongly to the unsurprising announcements of the Fed, with a gain of 1% on the Dow Jones and a jump of 2.5% on the Nasdaq. The trend therefore looks much less favourable, after this brief technical jump and while the S&P remains around the threshold of the ‘bear market’ level.

In today’s US economic news, housing starts and building permits for the month of May will be released at 2:30 p.m. (FactSet consensus 1.71 million for housing starts and 1.8 million for permits). The weekly jobless claims for the week ending June 11 will be announced at the same time (consensus 218,000). The Philadelphia Fed regional manufacturing index for June will also be released at 2:30 p.m. (consensus 4.5).

The US Federal Reserve raised its main key rate yesterday Wednesday by three quarters of a point (75 basis points) to bring it between 1.50% and 1.75%, the first gesture of such magnitude in 28 years, in 1994! The US central bank has signaled its intention to continue to raise this “fed funds” rate to 3.4% at the end of 2022, then to 3.8% at the end of 2023, in order to curb inflation that it has long underestimated. estimated.

In its press release, the Fed’s Monetary Policy Committee (FOMC) said it was “firmly determined to bring inflation back to its target of 2%”, and remains “very attentive to inflationary risks”. Fed Chairman Jerome Powell indicated during his press conference that he did not rule out a further 75 basis point hike at the next meeting on July 26 and 27. “From the perspective of where we are today, it looks likely to do a 50bp or 75bp hike at our next meeting,” he said, noting that the magnitude of the hike will depend on economic indicators. He clarified, however, that 75bp hikes would not become “business as usual”.

In their new economic projections published on Wednesday, the members of the FOMC significantly raised their median forecast for the “fed funds” rate, to 3.4% for the end of the year, against 1.9% forecast in the last projections made in March. The FOMC then sees rates rise further to reach 3.8% at the end of 2023 (against 2.8% expected in March) before returning to 3.4% in 2024 (2.8% expected in March).

The Fed expects so-called “PCE” inflation to hit 5.2% this year (vs. 4.3% forecast in March), while the core PCE index (excluding energy and food), the preferred measure of the central bank, should grow by 4.3% against 4.1% forecast last March. Note that the core PCE index came out at 4.9% in May, which means that Fed officials expect a slowdown by the end of the year, under the effect of monetary tightening undertaken by the central bank since last March (+0.25 point in March, +0.5 pt in May and +0.75 pt on Wednesday).

Continued monetary tightening, combined with the reduction of the Fed’s balance sheet, should then make it possible to slow down inflation, returning to 2.6% at the end of 2023 (2.7% for the core PCE), projections that have been little changed by compared to March. In 2024, price inflation should return to 2.2% (2.3% for core PCE), approaching the Fed’s long-term target of 2%.

The Fed now forecasts for 2022 a rise in US GDP of only 1.7% this year against 2.8% expected in March, and after a strong post-covid rebound of 5.7% in 2021. Growth should still be 1.7% in 2023 (against 2.2% expected in March) then 1.9% in 2024 (2% expected in March). However, Jerome Powell said on Wednesday that he did not observe a general slowdown in the American economy, and assured that the Fed “was not trying to push the economy into recession”. “We are trying to bring inflation down to 2%, (and keep) a strong labor market,” he explained. “That’s what we’re trying to do,” he insisted.

In its statement, the Fed noted that “general economic activity appears to have recovered after slowing in the first quarter. Job gains have been solid in recent months and the unemployment rate has remained low. Inflation remains high, reflecting pandemic-related supply and demand imbalances, as well as elevated energy prices and broader pricing pressures,” the central bank commented.

According to the new Fed projections, the US job market should remain solid, despite a slight increase in the unemployment rate expected to 3.7% in 2022, 3.9% in 2023 and 4.1% in 2024, against respectively 3.5%, 3.5% and 3.6% expected in March.

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