In the latest meeting of the US Federal Reserve (Fed), policymakers have confirmed that interest rate cuts are inevitable but not as early as the market expects. Building on this, BNP Paribas Asset Management indicates that the improvement in the latest US inflation data was encouraging. “…but policymakers need to see more of it over a longer period before they are convinced it is time to cut rates,” opines Andrew Craig, Co-head of BNP Paribas’ Investment Insights Centre.

According to Craig, the employment cost index (ECI), which measures wages and benefits, recorded the smallest increase since 2021. “The slower pace of growth in the ECI is distinctly good news for US policymakers, suggesting wage pressure is slowing along with goods inflation,” the Co-head of Investment Insights Centre explains.

Another sign indicating slow wage growth is the Atlanta Fed’s wage growth tracker, which stabilised at the slowest pace in two years. The asset manager further highlights that the personal consumption expenditure deflator (PCE), an indicator that the FOMC prefers to the consumer price index (CPI), was also reassuring.

That said, BNP Paribas explains the central bank’s cautionary approach to the Fed rate cut. Craig explains, “Although Chair Powell acknowledged the good news on inflation, he and his colleagues are wary of falling into the trap of easing monetary policy prematurely.”

Analysing the negative impact of the Fed’s dovish message on risk assets, Craig informs, “The day had already included results from some of the US mega tech stocks which disappointed in a context where equities has been priced for perfection.”  “Bonds rallied despite news of higher-than-expected supply in coming months,“ he adds.

Furthermore, the asset manager reports that despite the the message on Fed rate cut, the Fed fund futures curve predicted more rate cuts by the end of 2024 than it had before the Fed meeting.

Meanwhile, BNP Paribas AM stays cautious regarding investing in risk assets. Craig warns, “In an environment where central banks are likely to be wary of cutting policy rates pre-emptively and in the absence of certainty about the level of the neutral policy rate, the risks arising from an overly long period of restrictive monetary policy cannot be excluded.”

Read the complete insight here.