Jun 10 / Victor Arduin

Macroeconomics Weekly Report - 20240610

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An interest rate hike in the US in 2024 is looking more and more likely

  • There is growing apprehension in the market about the direction of inflation in the US, which has shown no progress in recent months.
  • The labor market is still showing strength, GDP continues to grow and the government is implementing a robust fiscal expansion, removing the risk of recession but making the fight against inflation more uncertain.
  • In this context, are US interest rates at a restrictive enough level to bring prices back to the 2% target? Although it's not likely, it's increasingly plausible to believe that there could be an increase in interest rates in 2024.
  • This poses challenges for markets such as commodities, whose demand is strongly linked to the value of the dollar and could suffer further appreciation in the event of an increase in interest rates


One of the most anticipated events for 2024 is the easing of monetary policy in the US, which is at one of the tightest levels in its history. With more than half the year gone by, apprehension is growing about the course of inflation in the world's largest economy.

The US economy remains resilient, showing growth of 1.3% in the last quarter. The government's fiscal deficit stands at 6.19% of GDP in 2023, equivalent to US$1.7 trillion. Even with a slowdown and high interest rates, the risk of recession is currently ruled out given the country's strong fiscal expansion.

Recent data from the US labor market reinforces the view that US inflation is still far from the 2% target. In view of this, the theory that the Fed could raise interest rates is becoming increasingly plausible, and that's what we'll be addressing in this report.

Image 1: US - Surplus/Deficit as a Percentage of GDP

Source: Federal Reserve Bank St. Louis

Image 2:  US - Non-Agricultural Payrolls

Source: Bureau of Labor Statistics

Lack of progress in recent months causes apprehension in the market

Guided by a dual mandate, the Fed seeks to promote price stability and achieve full employment in the American economy. Although labour market data indicates progress towards full employment, persistent inflation reveals that there is still work to be done to stabilize prices.

The US central bank has done a difficult and arduous job so far. Raising interest rates to 5.25-5.50% has brought uncertainties, especially the risk of recession, as various projections pointed out in 2023. Although the risks of an abrupt slowdown in the economy have been reduced in recent months, speculation is growing in the market that monetary policy may not be at a restrictive enough level to bring inflation to the 2% target.

The PCE is the main inflation indicator used by the Fed to make monetary policy decisions, as it is less susceptible to fluctuations in volatile items such as energy and food, providing a more accurate picture of household spending. However, the recent rise to 2.7% in March and April 2024 creates uncertainty about the future of inflation and the measures that will be taken to combat it. The rise in the PCE could lead the Fed to take more aggressive measures, such as raising interest rates.

Image 3: US – Monthly Retail Sales (%)

Source: Bureau of Economic Analysis

There are still no conditions for an interest rate cut

Considering the possibility of another interest rate hike in the US economy, US bond yields are expected to rise further in 2024, surpassing the 5% mark again. As a result, we could see further support for the dollar, already strengthened by the current macroeconomic conditions.

The scenario is becoming increasingly adverse for risky assets, especially commodities, whose demand is linked to the value of the dollar. The more the US currency appreciates, the more expensive it becomes for holders of other currencies to buy commodities. While supply-side fundamentals continue to benefit some sectors, demand remains subdued in an increasingly risk-averse environment.

Forecasts still indicate the possibility of two interest rate cuts by the Fed this year, starting in September. However, this depends very much on an improvement in the inflationary environment in the US, which has proved challenging. As progress towards the inflation target loses momentum, the plausibility of seeing a further increase in interest rates in the world's largest economy grows.

Image 4: US - Treasury Yields (%)

Sources: Refinitiv

There are external risks that could put pressure on inflation

There are other events that could put pressure on prices in 2024, but not as likely - something known in the field of statistics as "outliers". These risks are beyond the reach of the Fed's monetary policy and could push inflation above 4% in an extreme situation.

In recent years, we have witnessed problems in the supply chain, leading to a rise in the cost of several essential materials for industry in various sectors. We have seen an increase in sea freight costs, as well as a risk premium associated with energy costs, as a consequence of the problems in the Red Sea.

Climatic issues have also posed challenges, such as the low level of Lake Gatún in Panama, which has restricted the number of vessels that have been able to use the Central American route for cargo transportation since last year.

Therefore, not only domestic issues hinder the Fed's success in fighting inflation, but external challenges as well.

In Summary

The lack of progress on inflation in recent months has increased apprehension in the market that the Fed may need to tighten monetary policy further to bring prices back to its 2% target.

One of the reasons that has hampered the work of the American central bank is the strong fiscal expansion that the government has carried out in recent years, resulting in support for economic activity.

In this context, where GDP continues to grow and the labor market remains resilient, the theory that interest rates will need to rise again in 2024 to ensure that the disinflationary process continues is gaining strength.

The market is expecting two interest rate cuts starting in September, but the scenario remains uncertain. The FOMC (Federal Open Market Committee), as always, emphasizes that its decisions will be based on future data, which means that an interest rate increase is still possible, even with the expectation of cuts.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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