Central banks recalibrate their sights after expectations for 2024 fade

Investors were excited then by the prospect of looser financial conditions, and organizations like the International Monetary Fund feared that Powell and company would rush in, cut too quickly and undermine efforts to control inflation.

The fears proved unfounded.

The joint easing of monetary policy that seemed imminent at the end of 2023 has largely faded as major central banks have faced more persistent-than-expected inflation and more resilient economic and wage growth.

Some modest steps have been taken, such as initial cuts made this month by the European Central Bank and the Bank of Canada.

Largely to fulfill a promise made when inflation appeared to be falling rapidly, but the mood in Frankfurt, London, Washington and elsewhere has since shifted from some version of “start your engines” to something more akin to “slow down.” horses”.

After rapidly raising interest rates in 2022 and 2023 to fight inflation, the initial move to ease monetary policy will be “consequential,” Powell said at a news conference last week, as new projections from policymakers The Fed showed they anticipated only a quarter-percentage-point rate cut by the end of the year, less than the three they had projected in December and March.

“As we begin to ease monetary policy, that will be reflected in a significant easing of financial market conditions,” Powell said. “We want to do it right.”

Potholes in the road

Most economists polled by Reuters now expect only one or two Fed rate cuts this year instead of four in a survey last December, before Powell surprised markets by suggesting a move toward higher rates. casualties would come relatively soon. But economists have been more consistent in their opinions than market prices.

Economists’ forecasts for the ECB’s first move also held up, correctly predicting a cut in June. But once again, market prices have changed dramatically: in December they assumed 140 basis points of cuts next year, starting in March. Now market prices hardly see a new rate cut this year.

However, ECB policymakers have long warned of the “bumps in the road” that may arise when trying to get inflation back on target and, by indicating from the outset that the first cut will not be would happen until June, they signaled to the markets that perhaps they were getting ahead of themselves.