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US Politics: Sticking With Joe (For Now?)

• The shape of the US presidential election has become much more apparent in the past three months. However, the commentariat’s recent tilt towards a Trump victory seems premature and unsupported by the facts. I am, therefore, ‘sticking with Joe’ for now, at least.

By Alastair Newton

US Fed Funds Target Rate 5.25-5.5% (consensus 5.25-5.5%) in Mar-24

• The FOMC has decided to keep the Federal Funds target rate unchanged at 5.25-5.5%, reflecting solid economic growth and a strong labour market amid easing but still elevated inflation levels.
• Despite recent disinflationary progress, the Committee does not yet see enough progress to alter course. A tight policy setting is needed to effectively address inflation risks.
• The FOMC emphasizes a flexible, data-driven approach to future policy decisions. It is prepared to maintain or adjust the current level of policy restraint based on incoming economic data and the evolving outlook, particularly regarding inflation and labour market conditions.

US CPI Inflation 3.15% y-o-y (consensus 3.1%) in Feb-24

- US CPI inflation for February 2024 slightly exceeded expectations with a y-o-y rate of 3.15%. It's been broadly flat at this pace for five months.
- Core inflation, excluding volatile components, slowed to 3.8% y-o-y, hawkishly surprising by 0.1pp amid a resilient underlying trend.

Why Neutral Rates are High

• Market interest rates still price a mean reversion, albeit with less imminence than earlier this year. Resilient economic data imply the prevailing neutral rate is higher.
• Slow GDP growth suggests opportunity is low, depressing the consensus view of neutral, but rising time preferences in the post-pandemic regime would also drive rates up.
• We find reasons for this structural shift and are mindful that another regime change is unlikely outside of a recession. This still provides a hawkish anchor to our forecasts.

By Philip Rush