US | No need for a hawkish Fed tone amid an increasingly convincing inflation easing

Summary

To some extent, the recent adjustment in market expectations and its corresponding impact on broad financial conditions give the Fed some room to continue to convey that the next move will be a rate cut without risking an over-easing of financial conditions.

Key points

• Key points:
• Given that economic activity has continued to show strength, the Fed will likely convey that it needs a bit more time before feeling confident to signal its willingness to begin a rate-cut cycle soon.
• Employment data did not yield broad-based positive surprises either, but it continued to signal a gradual rebalancing in the labor market, still free from a worrying level of layoffs.
• December’s CPI inflation was also somewhat higher than expected, but the Fed’s preferred PCE index inflation figure released last week continued to suggest that the inflationary issue is largely resolved.
• Unlike the broadly encouraging data released ahead of last month’s FOMC meeting and its effect on a dovish Fed’s tone, recent data drove markets to slightly reassess their rate expectations.
• Overall, evidence since the last meeting suggests that a strong hint of a rate cut in March is unlikely, but the Fed could take another step to pave the way for the start of a rate-cut cycle soon.

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