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On Wednesday the U.S. Federal Reserve held interest rates unchanged. The target range for the Fed Funds Rate was maintained at 5.25% and 5.50%. The formal statement issued by the FOMC was cautious and guarded.
"The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge, that could impede the attainment of the Committee's goals."
Risk sentiment in markets was boosted as the central bank revealed policymakers were penciling in at least three rate cuts next year, according to the latest Blue Dot Plot. The average rate projection was 4.5% by the end of the year compared to 5.0% following the September meeting.
On Thursday, both the Bank of England and the European Central Bank also kept interest rates unchanged. Governor Andrew Bailey pushed back against market expectations of early rate cuts next year. Retaining the hawkish guidance that monetary policy is "likely to need to be restrictive for an extended period of time."
Christine Lagarde also waved off hopes of early rate cuts from the ECB. Headline inflation may have fallen and the growth outlook may have weakened but domestic inflation remained high. Wage growth levels (a major drive of domestic inflation) were incompatible with the inflation target of 2%, she said.
Fed Offers Sobering Message ... In the news conference on Wednesday, and in written statements following, the Fed did what it could to restrain the Wall Street bulls. "It's far too early to declare victory and there are certainly risks still facing the economy", Jerome H. Powell, the Fed chair, said.
The Fed indicated that it was too early to count on a "soft landing" for the economy. A reduction in inflation without a recession is increasingly the Wall Street consensus. Inflation, the glaring economic problem at the start of the year, has dropped sharply thanks, in part, to steep interest rate increases and a drop in energy prices. The Consumer Price Index rose 3.1 percent in the year through November. That was still substantially above the Fed target of 2 percent, but way below the inflation peak of 9.1 percent in June 2022. Producer prices were up just 0.2% in November.
An early decline in the federal funds rate, the benchmark short-term rate that the Fed controls directly, isn't a sure thing but stocks shot higher anyway, with the S&P 500 on the verge of a record. Traders were excited by the Blue Dot Plot.
Christine Lagarde Struck A Hawkish Tone ...
The European Central Bank left interest rates unchanged at a record high of 4 per cent this week. Christine Lagarde, president of the ECB, struck a hawkish tone after Thursday's decision, saying "Should we lower our guard? We asked ourselves that question. No we should absolutely not lower our guard. We did not discuss rate cuts at all. No discussion, no debate."
While acknowledging that underlying price pressures were easing, Lagarde said domestic inflation, largely driven by wage costs across the twenty countries that use the euro, was "not budging".
Future inflation risks ranged from, geopolitical tensions that could push energy prices higher in 2024, through to more extreme weather that could damage next year's harvests, she added. [Not to mention a Russian move on the Baltic states if EU funding is withheld from Ukraine.]
Governing Council member Francois Villeroy said "In mountains there are peaks and descents and there are plateaus. Today we are on a plateau and we need to give ourselves time to enjoy the view, to appreciate the effects of monetary policy."
"Barring shocks or surprises, rate hikes are over but that doesn't mean a quick rate cut is coming", Villeroy said Friday. Markets are still price in a cut by the end of the first quarter into April perhaps.
Bailey Warns Rates May Need To Rise Again ...
Governor Andrew Bailey says he can't say definitively "that interest rates have peaked".
The Bank of England has signaled it may not be finished raising interest rates as Bailey warned there was "still some way to go" in Britain's inflation fight. The Bank said price rises were proving more stubborn in Britain than in other developed economies. CPI inflation had fallen back as expected to 4.6% in October. Service sector inflation remained high at 6.6%. Latest earnings data suggested wages were rising at the rate of 7%. A rate incompatible with the 2% CPI target.
Mr Bailey said it was "too early to start speculating about cutting interest rates". The MPC warned that "further tightening" would be necessary if price pressures persist. "Hawks continue to baulk" about an easing of monetary policy
At the meeting, the Monetary Policy Committee (MPC) voted 6-3 to keep borrowing costs on hold at 5.25pc. Three members (Megan Greene, Jonathan Haskel and Catherine Mann) voted against the proposition, preferring to increase bank rate by a further 0.25% to 5.5%.
The hawkish stance on monetary policy is at odds with the Governor's gloomy outlook on the economy. The latest ONS data suggests economic expansion was confined to just 0.2% in October. The MPC missed the opportunity to hike rates at the November meeting. The MPC is now encamped on the plateau enjoying the view. Table Mountain versus the Matterhorn policy perhaps. Further rate hikes are off the table in 2024.
The hawkish stance is also incompatible with a government up for re-election next year. Calls for the Bank to ease off on interest rates are likely to grow in the months ahead. The Tories are already over twenty points behind in the polls. The Bank may just be able to offer a rate cut in the Spring. But unlike the election, it will be a close run thing.
Want to know more? Check out our Friday Forward Guidance updated every week.
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