A quick note about Fed

Although market did not realize it, but there were some meaningful change in the rhetoric Chairman Powell. They stick to their 3 cuts or 1 more cut forecast for this year, but silently raised their interest rate forecast, for next year and so. It was a small, but noticeable. I m sure, that they will raise further their medium term and longer interest rate forecast. I understand, that for a major Central Bank it is difficult to adjust their neutral rate estimation by one go since it could cause market panics, but eventually it is a must to happen and they should be a bit more aggressive. I like their newest position in terms of inflation, since it looks to me, that they start to understand, that it will be difficult to quickly get to 2 percent (without crashing the economy). Firstly they need to stabilize/bring down core inflation to around 3 percent.

I ma bit disappointed, that they have not raised their neutral interest rate forecast more and I m sure, that they cannot avoid to do it in the next 12 months. I still stick to my own 4-4,5 percent neutral rate estimation, but I understand, that it is difficult to move from 2,5 percent neutral interest rate estimation to well above 3,5% in one or even in two/three steps. I believe, that in about a year's time FED will acknowledge, that neutral rate is way above 3 percent.

In terms of their QE they have made a right announcement and want a smooth cut back. Most probably we will land somewhere around 6,7-6,9 T USD in about a year time. The statement in its own was a bit too dovish, but not so much as the market believes. I m sure, that - in their later meetings - they need to adjust their longer run interest rate forecast. They should skip minimum 2 cuts from their 2025/26/27 dot plot plan. A lot depends on geopolitics, but if US/EU will be able to make major economic/political deals with major BRICS+ countries early next year, then we can get back to lower inflation a bit faster.

Peter Heim

Budapest, 21/03/2024