Central Bank Watch – Fed Minutes and Speakers Kick off 2023

The highlight this week will be the FOMC Minutes on Wednesday from the December meeting. The equivalent meeting last year was when it became clear the Fed was pivoting to an aggressive agenda and the S&P had topped just two days before. From then we got the beginnings of the end for the stock market, crypto, bonds and a slew of other assets. We also get a barrage of Fed Speakers on Thursday and Friday, no doubt aware of marker expectations given last year.

Central bank monetary policy decisions and market activity interest rate decisions can have a dominant effect on financial markets, fiscal policy and geopolitics. We keep an eye on key banker developments, what they mean and what is ahead.

Central Bank Weekly Analysis and Outlook – Banker dynamics are complex. There are myriad facets to analyze and contemplate.

To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.

Weekly Recap and Outlook

A quiet week heading into Christmas and the New Year. We continue keep eyes on the bond market, as we have said the US 10-year Treasury peaked around 4.33% on the same day as the US dollar peaked against the yen USDJPY 151.95 on October 21. The BOJ had spent billions intervening and by the time the BOJ met late last month and surprised the market with the Yield control change the 10-year yield was consolidating after falling to around 3.40%, and the dollar was in a range between JPY134-JPY138.

We don’t think it was unintentional that the BoJ unexpectedly on December 20 announced it was widening the range of the 10-year yield under yield-curve-control to +/- 50 bp of zero. The BoJ took a lesson from the SNB and stellar traders going to wear there was most pain and getting the most bang for their buck. Keep an eye on such moves in 2023 from bankers.

Most of the G10 central banks may complete their rate hike cycles around the middle of the year or earlier, the unwinding of central bank balance sheets may continue longer, depending on the damage done.

Highlights – Federal Reserve

  • Federal Reserve Credit declined $4.9bn last week at $8.526 TN.
  • Fed Credit was down $375bn from the June 22nd peak.
  • Over the past 172 weeks, Fed Credit expanded $4.799 TN, or 129%.
  • Fed Credit inflated $5.715 Trillion, or 203%, over the past 529 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt were up $9.4bn last week at $3.318 TN.
  • “Custody holdings” were down $95bn, or 2.8%, y-o-y.

Central Bank Highlights This Past Week:

Central Bank Week Ahead:

The most notable event is FOMC minutes. St. Louis Federal Reserve Bank President James Bullard is scheduled to give a presentation on the U.S. Economy and Monetary Policy on Thursday. Richmond Federal Reserve Bank President Thomas Barkin and Atlanta Federal Reserve Bank President Raphael Bostic are scheduled to give speeches Friday.

This Week’s Interest Rate Announcements (Time E.T.)

  • None Seen

Monday January 02, 2023

  • Nothing Seen

Tuesday January 03, 2023

  • 19:30 AUD RBA Chart Pack Release

Wednesday January 04, 2023

  • 14:00 Fed FOMC Minutes when The Federal Reserve raised rates by 50 bp to a target range of 4.25-4.50% at their December meeting.

Thursday January 05, 2023

  • 09:20 Federal Reserve Bank of Atlanta President Raphael Bostic gives welcome remarks before the Federal Reserve “Day Ahead” Conference on Financial Markets and Institutions, 0820 CST/0920 EST/1420 GMT. No livestream. No Q&A at Federal Reserve Bank of Atlanta New Orleans Branch, 525 St. Charles Ave. 
  • 12:20 Federal Reserve Bank of St. Louis President James Bullard gives in-person presentation on the U.S. Economy and Monetary Policy before the CFA Society and St. Louis Rotary Club. No livestream. Audience Q&A expected.

Friday January 06, 2023

  • 11:15 Federal Reserve Bank of Atlanta President Raphael Bostic participates in “Global Economic Outlook” panel hosted by the National Association for Business Economics at the American Economic Association Annual Meeting. No livestream. Audience Q&A expected. No media Q&A. Hilton New Orleans Riverside, 2 Poydras St
  • 11:15 Federal Reserve Board Governor Lisa Cook participates in “Inflation – What Lies Ahead” panel hosted by the American Finance Association at the 2023 Allied Social Science Associations (ASSA) Annual Meeting. Text and Q&A from moderator and audience expected. No webcast. Sheraton New Orleans, 500 Canal St.
  • 12:15 Federal Reserve Bank of Richmond President Thomas Barkin speaks in person before the 21st Annual Economic Forecast Forum presented by the N.C. Chamber and the North Carolina Bankers Association. No livestream. Text available. Audience Q&A expected. No media Q&A. Sheraton Imperial Hotel, 4700 Emperor Blvd.
  • 15:30 Federal Reserve Bank of Atlanta President Raphael Bostic participates in panel, “Lessons from the Pandemic: Two Years Out” hosted by the International Banking, Economics and Finance Association at the American Economic Association annual meeting, No livestream. Audience Q&A expected. No media Q&A. Sheraton New Orleans, 500 Canal St.

Federal Reserve FOMC Schedule 2023

  • January 31-February 1, 2023 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)
  • March 21-22 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
  • May 2-3 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
  • June 13-14 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
  • July 25-26 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
  • September 19-20 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
  • October 31-November 1 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
  • December 12-13 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)

The Fed with a Strong US Dollar

The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.

The survey of 40 economists was conducted Oct. 21-26.

  • 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
  • 38% said the policy makers would be forced to cut rates earlier than expected and
  • 18% said the Fed would not be able to raise rates as much as planned.
  • Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.

The Fed as expected raised another 50 basis-points last meeting. The median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.

“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”

Anna Wong (Bloomberg chief US economist)

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Sources: TC WSJ Bloomberg

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