The Fed has not said ‘Mission Accomplished’ – the last time an American leader embraced those words was George W. Bush in 2023 after the invasion of Iraq and you know how that ended – but almost. The US central bank, which this Wednesday held its last meeting of the year, has sent a message of optimism to the financial markets: the ‘soft landing’ of the largest economy in the world is advancing, and its analyzes foresee three cuts in interest rates. interest in 2024, with falling inflation in that period. Thus, official interest rates would drop from the range of 5.25%-5.50% (in practice, 5.4%), where they have been for four and a half months, to 4.5%- 4.75%, which the central bank expects to be 4.6%.
That is what marks the ‘dotted line’, on which the members of the Open Market Committee (the central bank body that sets monetary policy) establish their forecasts for the price of money, GDP and inflation.
Compared to these projections with those of April, the Fed is betting on a continued reduction in inflation – both general and underlying – in the next three years. General inflation, thus, would fall from an average of 2.4% to 2.2% next year, while core inflation – which excludes energy and fresh food, the most volatile components – will fall from 2.6% to 2.3%. Core inflation is key, because its stubbornness has been one of the central bank’s main problems. The fact that core inflation is not decreasing indicates that the entire economy is at risk of suffering an acceleration in prices.
Meanwhile, the unemployment rate, despite the slowdown in economic activity, will continue to be close to its current 50-year low.
Now all that remains is for those forecasts to be fulfilled, of course. The central bank has been catastrophically bad with its ‘dotted line’. During the Obama and Trump presidencies he tended to exaggerate inflationary pressures and, under Biden, to downplay them, leading to the biggest explosion in prices in the last four and a half decades.
Predictably, the stock market reacted to the rise, thus continuing a new rally that began ten days ago when the central bank began to telegraph to the markets that things were going well on the price front and debt interest rates continued to fall, in anticipation of future rate cuts.
