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The best of both worlds ?

Rédigé par Thomas GIUDICI | Nov 21, 2023 8:36:43 AM

The markets were just waiting for this! By adopting a slightly more dovish tone than in his last statements, Jerome Powell, within the framework of the Fed's monetary policy meeting, allowed a spectacular easing of interest rates. The 10-year American rate, which was close to 5%, lost 50 bps in a few sessions, thus allowing a marked rebound in the main equity markets. How to go from one extreme to the other...

In detail, the Fed, unsurprisingly, left its key rates unchanged. On the other hand, the speech by the president of the American institution was much less virulent than during the September meeting. Indeed, if Jerome Powell indicated that he was not completely certain that monetary policy was, at this stage, sufficiently restrictive to bring inflation back towards the 2% target, he specified that after the extent of the tightening already carried out, the risk of an increase too much is now more balanced with the risk of doing too little. While monetary policy is already in restrictive territory and uncertainties about the impact of the rate environment on the economy are great, the members of the FOMC do not want to degrade the employment market too much (which constitutes the second term of the Fed). The Fed is therefore extremely cautious about potential additional tightening and prefers to give itself time to observe the diffusion of monetary policy to the economy. If Jerome Powell naturally suggested that other increases remained possible, he refused to confirm the latest “dot” which counted on an additional increase. More than a new pause, this Fed meeting marks, in our opinion, THE pause of the American central bank in its cycle of monetary tightening as we have been anticipating since the end of July.

The Fed's patience seems, in any case, to be paying off since the majority of macroeconomic indicators published last week across the Atlantic came out below expectations and confirm the slowdown of the American economy. On the labor market side, if Jerome Powell had indicated during the FOMC meeting that it remained tense, although rebalancing thanks to the increase in the participation rate, the job creations in October disappointed and the unemployment rate increased by 0.1 point to 3.9%. Although still historically low, this rate is the highest since January 2022. At the same time, wage tensions are also less strong. This employment report therefore confirms a less tight labor market, an essential element for a lasting drop in inflation.

As for the euro zone, the economic slowdown is no longer in doubt with GDP contracting in the third quarter and a further slowdown in inflation to 2.9% at an annual rate. It will be noted, quite surprisingly, that despite the large gap between economic and inflation dynamics between Europe and the United States, monetary policies remain, for the moment, on the same wavelength.