– No rush – E24

Faith in interest rate cuts is becoming less and less.

American inflation has started to point in the wrong direction again, while the labor market and the economy remain strong.

That is the backdrop central bank governor Jerome Powell brings to today’s interest rate meeting at the US central bank, the Federal Reserve (Fed).

No one expects that there will be any rate cut when the decision is presented on Wednesday evening, and no new forecasts for interest rates and the economy are presented either. Thus, it “boils down to the press conference” that Powell holds afterwards, points out Knut A. Magnussen, senior economist at DNB Markets.

– I think Powell will to a greater extent have to admit that inflation is higher than they want. There is now a slightly longer way to go before the Fed is convinced, but I don’t think he will be very specific on when or how much the interest rate may be lowered, says Magnussen to E24.

He refers to the meeting as a “way station on the way to June”.

Amanda Sundström, acting chief strategist at SEB, believes the governor of the central bank has previously been more duet duetDove and hawk are used to describe different approaches to interest rate setting and central bank policy. Doves prefer lower interest rates and cuts, while hawks prefer higher interest rates and increases. and optimistic in his statements.

– In the press release, we will see a fairly unchanged wording, but I think that Powell himself will respond more hawkishly now.

– No rush

High price growth is the main reason why the interest rate in the USA was quickly raised to the range of 5.25–5.50 per cent. It has been there since last summer.

Inflation has calmed down a lot from the peak just under five years ago, but recently the decline has stopped at a significantly higher level than the central bank’s inflation target of two per cent.

In March, CPI inflation climbed to 3.5 per cent and PCE inflation to 2.7 per cent, while core inflation in both cases was at the same level as the previous month.

The labor market continues to deliver low unemployment and stronger job growth than expected.

– Now that inflation is rather on the way up again, and the rest of the economy is doing well, there is no rush. The Fed believes that the interest rate level is tightening, that it will work, but it may be a longer process than thought, says Magnussen.

Less faith in interest rate cuts

The economic development has contributed to the fact that belief in interest rate cuts in the US has been greatly reduced in recent months.

The market is now only pricing in one rate cut in full in 2024, and a certain chance of a second one. Around the New Year, it was believed that there would be as many as six cuts this year. There is about a 60 per cent chance that the first interest rate cut will come in September.

When the central bank last made forecasts in March, Fed members estimated that there would be three interest rate cuts this year.

Magnussen in DNB Markets and Sundström in SEB have two 2024 cuts from the Fed in their forecasts, one in September and one in December.

– But we are dependent on getting surprises on the downside for inflation in order for that to happen. We must start to see that it is not an acceleration, and the labor market must come more into balance, says Sundström.

Affects Norway

What happens to interest rates in important economies such as the US and the eurozone also affects Norges Bank and interest rate setting here at home. Among other things, this is about the krone exchange rate, which is at weak levels, being affected by interest rates and interest rate expectations.

Many expect the European Central Bank (ESB) to cut interest rates in June.

Magnussen believes that the United States and the dollar matter more now than in the past.

– With the repricing of the interest rate, the dollar has strengthened. It looks like it has quite a big effect on the currency market, he explains.

Sundström also acknowledges that the krone exchange rate is a “big headache for Norges Bank”, and she believes that the Norwegian central bank, just like the American one, can now wait and see. The SEB strategist nevertheless points to the ESB as the most important for Norway now.

– But that assumes that the inflation outlook continues to look good in Norway.