The FED and its president, Jerome Powell, have decided that interest rates will remain unchanged. When will we see the first cut?
The situation on interest rates has changed dramatically compared to last month. Chairman Jerome Powell announced the Federal Reserve’s (FED) decision of 1 May 2024, which ruled out a rate hike in the coming months.
This statement denotes a change of course on the part of the US central bank, as its president had announced his intention to make at least three rate cuts during 2024 in past meetings.
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The Fed’s decision
The FOMC (Federal Open Market Committee) meeting on 1 May ended like the four previous ones, i.e. with nothing. The Federal Reserve decided not to change interest rates, which remain fixed in the range of 5.25% to 5.5%. What weighed on the decision, which was taken by a unanimous vote of all meeting participants, was mainly inflation. According to the latest Consumer Price Index (CPI) data, published on 10 April 2024, inflation in the US stands at 3.5%, still well above the 2% target.
In short, the current scenario is very different from the one assumed at the beginning of 2024. At that time, experts predicted six or seven downward adjustments in interest rates, in the grip of the wave of optimism that had swept through the investment sector. In March, then, after revising expectations, Powell announced his intention to make at least three cuts during 2024 starting in June.
The labour market also falters
In April, the US labour market was also less buoyant than in previous months. According to the report released in early May, the unemployment rate rose and new jobs were fewer than analysts had expected.
The ‘Nonfarm Payrolls‘ figure, i.e. payrolls excluding the agricultural sector, returned +175,000 instead of the +240,000 expected, while the unemployment rate rose from 3.8% to 3.9%. These figures are particularly harmful compared to those of March (around 300,000 new jobs and the unemployment rate at 3.8%), reflecting the market’s optimism.
The reaction of the markets
Although, in theory, the postponement of the interest rate cut should not be exactly positive news for the markets, the major US indices reacted well to the FOMC decision.
On the same day, the S&P 500, the index tracking the performance of the five hundred most capitalised American companies, lost about 1.5%, only to recover in the following days. It is currently in the 5,185 area, thanks to a bullish movement that started the day after the meeting of about +3.5%. The NASDAQ and the Dow Jones also performed well over the past week. They rose by 4.7% and 3% respectively.
In recent months, the performance of the US stock market seems increasingly decoupled from the country’s monetary policy. The leading indices are close to all-time highs and do not suffer from the periodic postponement of interest rate cuts.
What will the Federal Reserve decide in the coming months? The central bank’s main objectives remain the same as in March: to control inflation and promote employment, although the situation has worsened compared to two months ago. Will inflation go back down, and will this allow the US central bank to proceed with the first, long-awaited interest rate cut? Or will the FOMC and Jerome Powell change their minds again, and the cost of money remains unchanged throughout 2024?
If we were to see the first scenario, interest in the crypto sector could also grow as government bond yields decrease. You can prepare for this possible scenario by buying Bitcoin on our app!
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