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Federal Reserve minutes reaffirm prospect of interest rate turnaround

The minutes of the Federal Open Market Committee's (FOMC) latest interest rate decision underlined that while patience is still needed in the fight against inflation, key interest rates should have peaked. Meanwhile, Thomas Barkin, President of the Federal Reserve Bank of Richmond, was confident that the US economy was on its way to a soft landing, but that there were still obstacles that called for caution. However, financial market reactions were limited. The euro rose slightly against the US dollar and the yield on ten-year US government bonds remained below 4%.

Alessandro Fezzi, LGT
Temps de lecture
5 minutes
Federal Reserve
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On the New York Stock Exchange, sentiment remained subdued after the sobering start to the year, and the Federal Reserve minutes had little impact. Technology stocks remained under pressure. The Dow Jones Industrial closed 0.76% higher at 37,430.19, while the S&P 500 fell 0.8% to 4,704.81. The Nasdaq lost a further 1%. The euro pared losses somewhat following the release of the Fed minutes. In the US bond market, the yield on ten-year Treasuries fell back to 3.91%, still below the 4% mark.

The minutes of the Fed's FOMC meeting on 13 December confirmed the prospect of a turnaround in US interest rates. Council members felt that "clear progress" had been made in the fight against inflation and that the federal funds rate was at or near its peak in this tightening cycle. Nevertheless, monetary policy should remain restrictive for the time being until inflation has come down in a clear and sustainable manner. However, it was noted in the conclusion that, based on their baseline forecast for the end of 2024, almost all members of the rate-setting committee considered lower interest rates to be appropriate.

The president of the Federal Reserve Bank of Richmond, Thomas Barkin, expressed confidence on Wednesday that the US economy could achieve a soft landing. The central banker pointed to progress in the fight against inflation. However, with economic growth still fairly robust, a tightening of interest rates could remain on the table. The Fed has made real progress, and there is a good case to be made that inflation will fall to normal levels while the economy remains healthy. Barkin compared the Fed's task to that of a pilot bringing a plane in for a landing. There are four risks: The economy could "run out of fuel", or there could be "unexpected turbulence", such as geopolitical events or a banking shock like in March 2023. There is also the risk of "flying into the wrong airport", i.e. inflation remains above the Fed's 2% target, or we experience a "delayed landing" where demand remains unexpectedly high and fuels inflation. According to Barkin, "the airport is on the horizon, but it's not easy to land a plane, especially when the outlook is foggy and headwinds and tailwinds can affect the course".

Meanwhile, the ISM Manufacturing index improved from 46.7 to 47.4 in December (consensus 47.1). However, this is the 14th month in a row that the Institute for Supply Management's closely watched indicator has remained below the growth threshold of 50 points, signalling contraction in the sector. According to the ISM, companies continue to hold back on production in the face of a prolonged slump in orders.

China led losses in the Asia-Pacific region on Thursday, followed by Japanese stocks, which resumed trading after the extended Lunar New Year holiday. China's CSI 300 Index fell 1.4%, leading losses in Asia, while Hong Kong's Hang Seng Index fell 0.7%. Tokyo's Nikkei 225 lost 0.6%. South Korea's Kospi fell 0.9%. In Australia, the S&P/ASX 200 continued to fall, closing 0.4% lower.

Corporate news in focus: Next Q4 sales, Walgreens Boots Alliance Q1 figures and Svenska Handelsbanken investor day.

Economic data in focus: France CPI December (08:45), PMI Services December Spain (09:15), Italy (09:45), France (09:50), Germany (09:55), Eurozone (10:00) and UK (10:30). Germany Consumer Prices December (14:00). From the US: ADP Employment Change December (14:15), Initial Jobless Claims Weekly (14:30), PMI Services (15:45).


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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