The cost of money in the US continues to be at its highest level in more than two decades. The Federal Reserve has kept interest rates within the 5.00-5.25% range, which has been in place since July last year. Given the improvement in the inflation situation, reductions are inevitable in the coming months. However, the monetary authorities believe it will still be too early to start easing at the next meeting in March.
The underlying strength of price pressures in the US over the past six months at both core and consumer inflation levels is consistent with the Federal Reserve's target. However, FOMC policymakers seek reassurance that this is a suitable phenomenon and that price increases will not accelerate, ruining the credibility of the monetary authorities. Crucial factors will include developments in the labour market. New job growth has clearly lost momentum over the past year, and labour demand is weakening, as reflected in the number of vacancies or the average number of working hours per week. These are factors that central bankers should ease the fear of a dangerous wage-price spiral emerging.
At the same time, the economic situation is so favourable that the Fed does not need to rush into cuts and can wait calmly to be sure that inflation has been brought under control. Time is playing in the policymakers' favour. The cycle of increases, which has seen rates hiked by a total of 5 percentage points since March 2022, is only just reaching its greatest impact on consumer behaviour. Each month also drains the accumulated savings during the pandemic, which in past quarters were a significant element behind the high dynamics of household spending.
May is the most likely date for the first cut. The market is pricing the probability of such a move at more than 90% and expects six cuts of a total of 150bp in the coming months. The collapse of hopes for a March cut has strengthened the position of the US dollar as the strongest of the main currencies this year. The EUR/USD has slipped to 1.08. We expect the deceleration in economic growth and the start of the Fed's cuts to put the US dollar back on a downtrend later in the year after a winter rebound. Conotoxia's currency forecasts assume that the main currency pair will rise towards 1.15 at the end of December.