Will two doves make a summer?

At a hearing on Capitol Hill, Federal Reserve Chair Jerome Powell hinted at the prospect of an easing of monetary policy in the not-too-distant future. In Frankfurt, his counterpart Christine Lagarde made a similar point at the end of a Governing Council meeting which concluded with the ECB maintaining its key interest rates.

On both sides of the Atlantic, central bankers are pleased to see that inflation is falling, but want to wait a little longer before cutting rates. A first move in June seems realistic in the USA and Europe, provided that inflation evolves in line with forecasts. In this respect, the projections unveiled by the ECB point to an increase in consumer prices of 2.3% in 2024 and 2.0% in 2025, i.e. slightly less than predicted last December.

Christine Lagarde noted, however, the persistent pressure on prices of “domestic” goods and services, partly as a result of strong wage growth. Waiting until June will enable the Governors to know “a lot more” than in April, the date of the next Board meeting. The same is true in the USA, where Jerome Powell asserted that the FOMC was no longer far from having sufficient confidence to “dial back”.

By emphasizing the importance of forthcoming data, central bankers are inviting their audiences to scrutinize the flow of indicators, at the risk of overreacting to sometimes unreliable figures. Published on Friday, the latest employment report highlights a cooling in the US labour market. In particular, the creation of 275,000 jobs in February is misleading, as there was a sharp downward revision in hiring in January (from 353,000 to 229,000!) and December. The household survey highlights a decline in employment and an increase in the jobless rate from 3.7% in January to 3.9% in February. The decline in job vacancies and spontaneous quits in January also reflects a slackening of the economy, which should lead to a slowdown in consumption. On the companies’ side, the downturn in the ISM services index (52.6 after 53.4) calls into question the improvement in the business climate seen in previous months, as in the manufacturing sector.

Jerome Powell’s conciliatory remarks and symptoms of moderating activity have led to a slight decline in dollar yields. The 10-year T-Note fell back below 4.1%, after crossing 4.3% in February. In Europe, euro-denominated yields also fell in the run-up to the interest-rate cut scheduled for June.

Outside the eurozone, sterling and Swiss franc yields followed the general trend, shedding a few basis points. The Bank of England and the SNB will hold monetary policy meetings on Thursday March 21. Both central banks are likely to hold back, but we can’t completely rule out a cut from Thomas Jordan and his colleagues, who are already faced with inflation below the 2% target.