Federal Reserve Decision: In the US, inflation is slowing and the economy is struggling

Inflation has eased without causing a significant recession in the US; Economic activity showed signs of being maintained through the end of 2023.

• Core inflation – excluding food and energy prices – in the personal consumption expenditure index (PCE, an index specifically monitored by the central bank), reached 2.9% year-on-year in December, falling below 3% for the first time since March 2021. .
• In 2023, despite tighter monetary policy and rising interest rates, real US growth reached 2.5% year-on-year.
• In particular, growth reached 3.3% year-on-year in the fourth quarter of 2023, beating investors' estimates (2%).¹.

A continuation of the central bank's key rates is expected for today's meeting.

• At its last monetary policy meeting on December 13, the central bank also kept its rates unchanged at 5.25 to 5.5%.
• The Fed's last rate hike — 25 basis points — was in July 2023.

• The exact pace and date at which the central bank will start cutting its key rates remains uncertain. However, the level of activity in the US economy precludes fears of a recession linked to overly restrictive monetary policy: the latter may see less risk in maintaining its rates at their current levels for a long time.
• As the IMF said yesterday, “the short-term challenge for policymakers is to properly manage the eventual decline in inflation toward index targets.”².

Last week, the European Central Bank left its rates unchanged. Tomorrow, the Bank of England will make its monetary policy decision – widely expected to keep its rates on hold.

The IMF yesterday revised up its global growth forecast for 2024 (+0.2%) compared to its October forecast, driven by an improvement in the US outlook (+0.6%) and China (+0.4%). The outlook for the Eurozone worsens further (-0.3%).

• Eurozone growth is significantly driven downward by Germany, which experiences negative growth of -0.3% in 2023.
• The absence of a recession in the euro zone in 2023, but the absence of a clear positive outlook for 2024, makes the decision regarding the pace of easing its monetary policy more risky for the ECB than for the central bank.
• Central Bank President Christine Lagarde announced in her latest decision on January 25 that the governing body will “rely on data” to define this pace.³.