With the markets rattled by inflation concerns as Central bankers continued with the higher for mantra we had the FOMC Meeting minutes without any surprises and speeches by Fed officials. Surprisingly though, St. Louis Fed President Bullard (not an FOMC voter), who is generally more hawkish after the hotter than expected core-PCE Price Index was released, remarked that “it appears that the Fed may be able to disinflate in an orderly manner and achieve a relatively soft landing.” The Reserve Bank of New Zealand raised by another 50 bps to 4.75%. The Bank of Korea left its base rate at 3.50%. The central bank of Turkey cut its interest rate by 50bps to 8.5%.
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
This week’s central bank main events were:
- The Reserve Bank of New Zealand aggressive hiking cycle continues. It raised its Official Cash Rate by another 50 bps to 4.75%, as expected.
- FOMC Minutes for the Jan. 31-Feb. 1 meeting indicated that “…substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.”
- The Bank of Korea left its base rate at 3.50%, as expected, but also noted that the pause is not a signal that the rate hike cycle is over.
- The central bank of Turkey cut its interest rate by 50bps to 8.5% in its February 2023 meeting, interrupting its rate-cut pause as expected by markets, to further loosen financial conditions in response to the country’s earthquake disaster.
- St. Louis Fed President Bullard (not an FOMC voter), a hawkish Fed official, after the hotter than expected core-PCE Price Index was released, remarked that “it appears that the Fed may be able to disinflate in an orderly manner and achieve a relatively soft landing.”
- European Central Bank policymaker Nagel said that a “robust” rate hike is needed in March and that more hikes are likely to follow.
- Bank of Japan Governor nominee Ueda said that the joint statement does not need to be changed at this time and that current monetary easing is appropriate.
- Bank of England policymaker Mann said that more tightening is needed and that a policy pivot is not imminent.
- European Central Bank policymaker Villeroy de Galhau said that there is “excessive volatility” in the market’s view of the terminal rate.
- The Reserve Bank of Australia’s latest policy minutes showed a debate over the size of a rate hike and an acknowledgement that private sector wages will show an above-forecast increase for Q4.
February 24 – Bloomberg (Toru Fujioka): “Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment… Ueda said the BOJ should continue with stimulus for now, while flagging the need to consider returning to a normal policy approach if the outlook for prices clearly improved. He said it would still take some time to reach stable and sustainable inflation in Japan… ‘If I’m appointed BOJ governor, my mission isn’t to come up with some kind of magical, special monetary policy,’ Ueda said. ‘As I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll still take some time until we’ve securely achieved 2% inflation.’”
February 24 – Bloomberg (Toru Fujioka):
Eyes on the Bond Market
U.S. Treasuries added to their losses Friday while sovereign debt also retreated. Treasuries widened their losses in reaction to the Personal Income/Outlays report for January, which showed the Fed’s favorite indicator PCE Price Index accelerated from the December level. There were other strong economic reports including a much stronger-than-expected Services PMI (8-month high), New Home Sales for January and an upward revision to the final reading of the University of Michigan Consumer Sentiment.
Yield Watch
- 2-yr: +9 bps to 4.78% (+17 bps for the week)
- 3-yr: +10 bps to 4.51% (+19 bps for the week)
- 5-yr: +11 bps to 4.21% (+17 bps for the week)
- 10-yr: +7 bps to 3.95% (+12 bps for the week)
- 30-yr: +6 bps to 3.94% (+5 bps for the week)
Highlights – Federal Reserve
- Federal Reserve Credit dropped $44.3bn last week to $8.349 TN.
- Fed Credit was down $552bn from the June 22nd peak.
- Over the past 180 weeks, Fed Credit expanded $4.622 TN, or 124%.
- Fed Credit inflated $5.538 Trillion, or 197%, over the past 537 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt rose $6.6bn last week to $3.353 TN.
- “Custody holdings” were down $105bn, or 2.8%, y-o-y.
Rate markets saw Fed rate hike expectations continued to creep higher and is now pricing peak Fed funds at 5.40% for the June 24th FOMC meeting, up 12 bps this week and 56 bps since February 2nd. Expectations for the December meeting policy rate jumped 22 bps this week (up 88bps in three weeks) to 5.28%. Market pricing now has consecutive rate increases at the March, May and June FOMC meetings, with about a 20% probability for a 50-bps hike next month.
Fed 2023 Bank Stress Tests.
The Federal Reserve on Thursday released the hypothetical scenarios for its annual bank stress tests. This year, 23 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets. Last year the Fed found all 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks.
Central Bank Highlights This Past Week:
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.
- Reserve Bank of New Zealand aggressive hiking cycle continues. It raised its Official Cash Rate by another 50 bps to 4.75%, as expected.
- FOMC Minutes for the Jan. 31-Feb. 1 meeting. The Minutes indicated that “…substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.” There were also a few participants that wanted to raise rates by 50 basis points at the meeting. There wasn’t anything too surprising in the Minutes.
- The Bank of Korea left its base rate at 3.50%, as expected, but also noted that the pause is not a signal that the rate hike cycle is over.
- The central bank of Turkey cut its interest rate by 50bps to 8.5% in its February 2023 meeting, interrupting its rate-cut pause as expected by markets, to further loosen financial conditions in response to the country’s earthquake disaster.
Central Bank Week Ahead:
In the week ahead we have the FOMC Meeting minutes and speeches by Fed officials. Central banks in South Korea, New Zealand, and Turkey will have monetary policy meetings.
The Fed’s preferred PCE inflation gauges are released on Friday for January. Headline PCE inflation is likely to rise at a slightly slower pace than headline CPI’s 0.5% m/m gain and also for core PCE inflation ex-food and energy that should rise a little more softly than the 0.4% m/m core CPI gain.
In the week ahead we get three central banks delivering policy decisions.
This Week’s Interest Rate Announcements (Time E.T.)
- None Seen
This Week’s Central Bank Speeches, Meetings (Time E.T.)
Monday February 27, 2023
- 04:00 BoE MPC Member Broadbent Speaks
- 10:30 Federal Reserve Board Governor Philip Jefferson speaks on “Recent Inflation and the Dual Mandate” before virtual Harvard University Macroeconomics Course (Ec10), Audience Q&A expected. Livestream at https://harvard.zoom.us/j/96404381478?
- 12:00 ECB’s Lane Speaks
Tuesday, February 28, 2023
- 05:15 BoE MPC Member Cunliffe Speaks
- 06:30 RBI Monetary and Credit Information Review
- 07:15 BoE MPC Member Pill Speaks
- 07:30 BoE MPC Member Mann
- 14:30 Federal Reserve Bank of Chicago President Austan Goolsbee speaks at Ivy Tech Community College on its Elkhart campus. No livestream. No audience Q&A or media scrum.
- 20:30 BoJ Board Member Nakagawa Speaks
Wednesday, March 1, 2023
- 05:00 BoE Gov Bailey Speaks
- 05:00 German Buba President Nagel Speaks
- 05:00 German Buba Wuermeling Speaks
Thursday, March 2, 2023
- 07:30 ECB Publishes Account of Monetary Policy Meeting
- 07:30 ECB’s Schnabel Speaks
- 10:00 BoE MPC Member Pill Speaks
- 16:00 Federal Reserve Board Governor Christopher Waller speaks on the economic outlook before virtual Mid-Size Bank Coalition of America event. Q&A from moderator. Livestream at https://midsizebanks.zoom.us/j/7579609214?pwd=cDFoWXlMNmIwVTVuY3BqSVY3ajlpZz09.
Friday, March 3, 2023
- 03:30 ECB’s De Guindos Speaks
- 11:45 Federal Reserve Bank of Atlanta President Raphael Bostic welcome remarks before the Racial Inequality Conference organized by the Laboratory for Aggregate Economics and Finance at University of California–Santa Barbara. Livestream: Recorded video will be posted on https://www.atlantafed.org/about/atlantafed/outreach/events.aspx at release time. No Q&A.
- 15:00 FOMC Member Bowman Speaks
- 16:15 Federal Reserve Bank of Richmond President Thomas Barkin speaks in person on “What’s Keeping Inflation Elevated?” before the Stanford Institute for Economic Policy Research (SIEPR) 2023 Economic Summit. No livestream. Text, Q&A, other details TBA
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)
Latest Key Central Bank Decisions, Reports Archive
2023
- ECB Raises Rates Another 50bps, Lagarde Says Another 50bps in March
- Bank of England Raises Interest Rates 50bps to 4.0%, Projects Inflation Likely Peaked
- Hong Kong’s Monetary Authority Raised Interest Rates 25bps Lockstep with US Federal Reserve
- Brazil Central Bank Left Rates Steady for Fourth Month at 13.75%, Cautious Due to Fiscal Risk
- Federal Reserve Raises Rates 25bps as Expected, Disinflationary Process has Started
- Bank of Canada Hikes Rates 25 bps to Highest Level Since 2008, Signals Holding Pattern
- Norway Holds Interest Rate at 2.75 percent, Signaled More Hikes Ahead
- Turkey Central Bank Left Interest Rates Unchanged at 9% As Lira Hits New Lows
- Bank Negara Malaysia Leaves Interest Rates Unchanged to Assess Previous Hikes Impact
- Bank Indonesia Raised Rates Another 25 basis points to Highest Level Since 2009
- Federal Reserve Beige Book Highlights Housing Markets Continued to Weaken
- Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band
- Bank of Korea Raises Rates To 3.50%, Highest level Since August 2008
2022
- Turkey Central Bank Cuts Left Interest Rates Unchanged at 9%, Bond Yield Hits Six Year Low
- Bank Indonesia Raised Rates by 25 basis points to Highest Level Since 2009
- Yen Soars After Bank of Japan Mini Pivot Widens Yield Curve Control Band
- Banco de México Raises Rates by 50 bps to Record High 10.50%, Hints at More Hikes
- ECB Raises Rates Another 50 bps as Expected, Forecasts Higher Inflation
- Bank of England Raises Interest Rates 50bps to 3.5%, Projects Inflation Likely Peaked
- Taiwan Raised Interest Rate by 1.75 percent, Highest Since 2015
- Norway Raised Interest Rate by 25 bps to 2.75 percent, Highest Since 2009
- Swiss National Bank Raises Policy Rate by 50 bps to 1.00%, as expected
- Philippines Central Bank Raised Rates by 50 basis points to 5.50% with Inflation at 14 Year Highs
- Hong Kong’s Monetary Authority Raised Interest Rates in Lockstep with US Federal Reserve
- Federal Reserve Raises Rates 50bps as Expected, Hawkish Revisions to Unemployment and Inflation
- Bank of Canada Hikes Rates 50 bps to Highest Level Since 2008
- Reserve Bank of India Hike Rates Fifth Time in a Row to 6.25%
- RBA Raises Rates to Ten Year High 3.10%, says Inflation in Australia Too High
- Federal Reserve Beige Book Highlights Higher Interest Rates Further Dented Home Sales
- NY Fed Williams Expects US Jobless Rate to Rise from 3.7% to 4.5-5.0%
- Turkey Central Bank Cuts Interest Rates Another 150bp Ending Easing Cycle
- Sweden’s Riksbank Raise Rates by 75 bps to the Highest Level Since December 2008
- South Africa Raises Interest Rates 75bps to Tame Inflation
- Bank of Korea Raises Rates To 3.25%, Highest level Since June 2012
- Reserve Bank of New Zealand Raise Rates by 75bp to 4.25% to Highest Since January 2009
- Appreciation of Swiss Franc Guards Against Inflation says SNBs Jordan
- Fed Vice Chair Brainard says Slower Pace of Rate Increases Probably Soon
- Bank of England Raises Interest Rates 75bps to 3% in Biggest Rise in 30 Years
- Norway Raised Interest Rate by 25bps, Norwegian Crown Fell Against Euro
- Markets Reverse Sharply on Feds Powell Statements, What Does it all Mean?
- Federal Reserve Again Raises Rates 75bps as Expected, Hints at Possibly Smaller Hikes
- Japan Spent ¥6.35 trillion in October on Intervention to Support the Yen
- ECB Raises Rates Another 75 bps as Expected TLTRO Terms and Conditions Recalibrated
- Bank Indonesia Raised Rates by Another 50 basis points to 4.75% to Tame Inflation
- Federal Reserve Beige Book Highlights Employment Strength as Price Increases Generally Moderate
- RBA says Financial Stability Risks Have Increased Globally
- Banco de México Raised Rates for 11th Straight Time to Record 9.25%
- Cable Pounded Again After Indecisive Bank of England Statement
- Japan Intervened to Support Yen for First Time Since 1998 After BOJ Decision
- Swiss National Bank Raises Policy Rate by 75 bps to 0.50%, Swiss Franc Falls sharply
- Philippines Central Bank Raised Rates by 50 basis points to 4.25%, Moves to Support Peso
- Bank of Japan Monetary Policy Unchanged Sending Yen to a Fresh 24-Year Low
- Brazil Central Bank Pauses Rates at 13.75%, after Inflation Eased Below 10%
- Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test
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Sources: TC WSJ Bloomberg Scotia Bank
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