Mar 19 / Victor Arduin

Macroeconomics Weekly Report - 2024 03 19

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What to expect from the Fed this week?

  • In the upcoming Fed meeting (March 19–20), more information will be provided regarding the board's view on inflation in the country. The American central bank finds itself at a crucial moment, with improvement in some indicators and worsening in others.
  • While the labor market has shown a cooling trend, with rising unemployment, shelter costs remain resilient and energy prices are once again exerting pressure on inflation.
  • Market bets are for an interest rate cut in June this year, but there is growing sentiment of uncertainty and risk aversion, with Treasury yields rising sharply in recent weeks.


Once again, this week, the Federal Open Market Committee (FOMC) will convene to determine the course of monetary policy in the United States. While the market isn't expecting any rate cuts during this meeting, nor explicit guidance, the next upcoming meeting scheduled between April 30th and May 1st may introduce an official communication about the easing of monetary policy in the US.

If by the end of 2023 a more dovish view grew in the market regarding interest rates in the world's largest economy, the first months of 2024 show increasing uncertainty regarding inflation. Nevertheless, recent data supports the idea of a "soft landing" in the American economy, where bringing prices to the 2% target will be achieved without leading the economy into a recession. In this regard, let's discuss the possible outcomes of the Fed meeting that will conclude this Wednesday, March 20th.

Image 1: US – Treasury Yields and Fed Funds Target (%)

Source: U.S. Census Bureau

Image 2:  US – Inflation (%)

Source: Bureau of Labor Statistics

Seasonal components are putting pressure on inflation in the US

In general, the market still waiting for an interest cuts in June of 2024, but some considerations need to be pointed out. The CPI, which advanced by 0.4% in February, with 60% of the increase related to housing and gasoline costs. While shelter has been one of the most resilient components of American inflation, up by 5.7% over the last 12 months, energy, a more volatile component, is expected to exert pressure on the indices again in the coming months.

Analyzing data regarding the housing market in the USA, the property availability rate, a measure indicating the total stock of units for lease, was 6.6% in the fourth quarter of 2023, indicating a very tight market. The low supply of properties is exerting upward pressure on the rental market. Additionally, energy costs are reflecting the increase in oil prices and unscheduled shutdowns of the country's refineries, which have quickly removed more than 14 million barrels of gasoline from the country's stocks since February of this year.

Image 3: US - Housing Starts Seasonally Adjusted (Million Units)

Source: Refinitiv

At this moment, the Fed finds itself at a crucial point in its journey to bring prices to the 2% target. The combination of a strong economy, employment data showing moderation, and volatile components once again exerting pressure on inflation doesn't make it easy to predict the tone the Fed's communication will adopt this Wednesday. If current data still doesn't provide enough certainty for an interest rate cut, risks are growing around the economy with the current restrictive level, especially in the country's banking and real estate sectors, which is a concern for authorities in the country.

The PCE, the inflation index most closely watched by the American central bank, stands at 2.4% and is expected to continue improving in the coming months as it reflects fewer components exerting greater pressure on the CPI. That being said, we should expect a cautious Fed this week, with concerns about the trajectory of inflation, especially in the services and rental sectors, highlighting a cooling in the labor market. An increase in risk aversion is likely this month, with short-term treasury bonds appreciating. However, as more inflation data emerges in the coming weeks, we may witness a reversal of this scenario.

Image 4: US – Inflation YoY (%) in February

Source: Refinitiv

In Summary

There is room for a more conservative stance this week without announcing forward guidance towards easing monetary policy, as hawkish statements are part of the American central bank's efforts to anchor expectations. Therefore, there may be downward volatility for the rest of the month.

However, it is expected that this trend will reverse with the improvement of inflation data in the coming weeks. Despite some components causing concern, such as energy and housing, the overall balance reveals an improvement. Furthermore, the current restrictive level of monetary policy continues to contribute to the convergence of prices towards the 2% target. So, let’s wait for June!

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Thais Italiani


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