Mar 5 / Victor Arduin

Macroeconomics Weekly Report - 2024 03 05

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Inflation expectations show anchoring in the US

  • Because of the upward surprise in inflation data in January, we have seen a more cautious Fed with the long-awaited interest rate cut.
  • In the official announcement of the last meeting, a more hawkish tone was adopted. Despite increasing risk aversion, the speech was important for continuing to anchor inflation expectations.
  • However, even in the face of a still uncertain scenario due to possible external shocks coming from Europe or the Middle East, the trend is for an interest rate cut to take place in June this year.


One of the most significant events on the international macroeconomic scene in 2024 will undoubtedly be the interest rate cut in the United States. Despite inflation reaching its worst level in 30 years over the last two years, the rapid and firm response of restrictive monetary policy has managed, over the last 20 months, to slow inflation from a high of +9.1% (June/22) to +3.1% (January/24).

However, upward surprises in the labor market, such as the latest non-farm employment report which registered an increase of 353,000 jobs (+6.01%), and the persistence of inflation in some service sectors, such as transportation and medical care, led the Fed, at its last meeting, to adopt a more cautious stance with regard to easing borrowing costs in the country. Despite this, inflation expectations seem to be well anchored, painting a favorable scenario for inflation this year. This will be the focus of our analysis.

Image 1: US - CPI inflation (%)

Source: Bureau of Labor Statistics         

Image 2: US - Increase in Non-Farm Payrolls (thousand jobs)

Source: Bureau of Labor Statistics

Where are US Treasuries going?

One of the reasons why the Fed, needs to be cautious about inflation and adopted a more hawkish discourse at its last meeting is to keep inflation expectations anchored, a risk less discussed in relation to employment data, but just as important. Currently, the median inflation expectation for the next 12 months stands at 3.1%, despite a slight worsening in the February data. We haven't seen optimistic inflation expectations at such a positive level since March 2021.

However, there are some risks that could bring volatility to the market, but without altering the natural trend of general prices converging towards the 2% target. Rental inflation remains high, a phenomenon that is difficult to explain, perhaps linked to the fact that high interest rates have driven buyers away from real estate financing and consequently heated up the rental market. Another risk, beyond the control of monetary policy, is the cost of transportation, which has increased due to logistical challenges in Panama (consequences of climatic effects) and the detour of ships from the Suez Canal (consequences of geopolitical effects).

Image 3: US - Inflation Expectations (Median)

Source: Refinitiv

Overall, the scenario seems quite favorable for an interest rate cut in June this year, especially if there is forward guidance to that extent at the next Fed meeting at the end of the month. Consumer confidence also strengthens the idea of anchored expectations. Even though the index fell two points in February compared to January, the gains made over the last 3 months are maintained and remain substantially higher than the historically low levels seen at the beginning of 2023.

Moreover, the Personal Consumption Expenditures (PCE), the inflation index most closely monitored by the Fed, dropped from over 5% in early 2023 to 2.4% in January 2024. This decline in prices has occurred without causing a recession in the country, a significant risk in the previous year but quite remote at this time, while also preserving the labor market without recording an increase in the unemployment rate.

Image 4: US - Consumer Sentiment Index

Source: Refinitiv

In Summary

The inflationary scenario in the United States still carries some risks for inflation that cannot be ignored, such as the strong expansion of economic activity in 2023 (+2.5%) and the resilient labor market.

In addition, inflation related to rents has taken longer to fall. Although it is widely discussed by the market and academics, it is not clear why this "delayed" effect of interest rates on this component has occurred.

So far, the cautious tone and hawkish speech were important in anchoring expectations and are part of the Fed's strategy to facilitate its process of reaching the 2% inflation target. A cut in the US interest rate is therefore expected by the end of the second quarter.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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