A precipitated action in a context of such high uncertainty would risk either feeding inflation or to unnecessarily slow demand.
The American federal reserve remains faced with a dilemma. On the one hand, inflation has been lower than expected in recent times, but on the other hand, inflationary anticipations are already up, consumers anticipating the likely effects of customs duties. In addition, important parameters such as the final level of customs duties or the future fiscal policy remain uncertain. Given these uncertainties, it could indeed be judicious for the officials of the American central bank to let the data speak before reacting. A precipitated action in a context of such high uncertainty would risk either feeding inflation or to unnecessarily slow demand. We therefore do not provide for a significant change in monetary policy at the FOMC meeting in May.
However, officials of the American central bank could be less confident about the economic dynamics. The press release should report “more moderate” growth, while emphasizing the “solidity” of the labor market. Overall, we expect them to adopt a somewhat bellicist tone, but rather in the sense of a prolonged break in interest rates than a possible increase. In the medium term, attention should remain focused on inflation and the question of whether the second round effects will go beyond the simple postponement of the price level induced by customs duties. These second round effects may result from disturbances of supply chains or a postponement of demand to limited national capacities. We believe that the federal reserve will at least wait for a slowdown in economic activity to allow disinflationist anticipations. This could be the case in the course of the year, which is why we continue to count on up to three Fed rate drops over the next twelve months.
