Fed should start to think about lowering its key interest rates? - Natixis

Patrick Artus, Research Analyst at Natixis, suggests that the United States has returned to full employment and is showing some signs which could herald a cyclical slowdown.

Key Quotes

“In this situation of full employment, there are now appearing some signals which could herald a cyclical slowdown:

- A decline in corporate profitability;

- Weak corporate pricing power, as companies cannot pass increases in their labour costs through to their prices; 

- The end of share buybacks.”

“If the Federal Reserve had used its customary Taylor rule, the Fed Funds rate would now be about 4%, and given the cyclical situation of the United States, the Federal Reserve would be starting to think about lowering its interest rates.”

“US monetary policy will probably have to be procyclical

Instead of thinking about lowering the Fed funds rate, which would be normal at full employment given the risks of a cyclical slowdown, the Federal Reserve will now have to restore some degrees of freedom, some leeway for monetary policy, in order to be able to act in the event of a recession in the future. 

This necessary hiking of the Fed Funds rate will probably take place in a situation of cyclical slowdown, so that US monetary policy will probably have to be pro-cyclical.”