By Groupama AM

J. Powell justified the 50bp Fed Funds cut with two arguments which imply that this pace is a priori an isolated decision:

• On the one hand, this reflects the Fed’s strong confidence in the downward trajectory of inflation. On the other hand, the Fed seems relatively confident about the outlook for growth and employment. J. Powell even acknowledges that the US economy is “strong” and that he has no information from his business contacts to suggest a weakening in labor market demand.
• On the other hand, this 50bp step is presented as the quid pro quo for the Fed’s patience in maintaining restrictive monetary conditions over the long term. This move would therefore not signal a new pace, but merely a “recalibration”.

The monetary outlook as announced in the dots may seem aggressive. Indeed, the median projection shows a Fed Funds cut of 100bp in 2024, the same in 2025 and 50bp in 2026. However, the expected path of the policy rate needs to be qualified in several respects:

– The envelope of 100pdb in 2024 is a close call. This is a median projection, given that 9 participants actually envisage a 100bp cut, while 7 anticipate a 75bp envelope. Note that the final monetary policy statement included a dissenting member for the first time since 2005.
– J. Powell strongly emphasized that the Fed was in no way bound by these dots, and that it could accelerate, slow down or pause. This trajectory is not a commitment, and the Fed will have no qualms about adjusting it.
– The Fed again raised its estimate of neutral Fed Funds, bringing the revaluation to +0.4% in 9 months (from 2.5% to 2.9%).
– Above all, the Fed has brought forward the cut in key rates, without revising GDP growth. In other words, growth projections do not incorporate the positive impact of monetary easing. However, we estimate that the easing of monetary and financial conditions over the past 3 months will inject around ½ point of additional growth next year. As a result, the Fed should ultimately revise its growth forecasts upwards, which should ultimately lead it to reduce the Fed Funds cut envelope. In other words, these forecasts do not “close”.

Our growth and inflation scenario is sufficiently divergent from the Fed’s to justify different monetary projections (see table). Consequently, today’s decision does not alter our analysis. We still believe that there is a “window of opportunity” to cut rates in Q4, but that this window should close again, justifying a cut of only 75 bps in key rates in 2024, followed by a pause in the first half of 2025.