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May 24, 2023
SGH Insight
Threading the Needle
Bottom Line: Despite Powell’s guidance, we can’t say there is no chance the Fed will hike again in June. There likely will not be data to convince the hawks that the Fed shouldn’t hike but could be data that forces Powell back to the rate hike camp. But the consensus at the Fed is trying to look through the data, and Powell appears to be in that consensus. In response, the hawks are setting up a fallback position that sets up a rate hike in July. The stronger the data, the more likely they will be successful.
Market Validation
Bottom Line: Despite Powell’s guidance, we can’t say there is no chance the Fed will hike again in June. There likely will not be data to convince the hawks that the Fed shouldn’t hike but could be data that forces Powell back to the rate hike camp. But the consensus at the Fed is trying to look through the data, and Powell appears to be in that consensus. In response, the hawks are setting up a fallback position that sets up a rate hike in July. The stronger the data, the more likely they will be successful.
Bloomberg 5/25/2023
Traders fully priced in another quarter-point interest-rate increase by the Federal Reserve within the next two policy meetings and a more than one-in-two chance that hike could arrive as soon as next month.
The shift came as US yields rose, with the policy sensitive two-year rate rising nearly 15 basis points to 4.5%. That’s the highest level since early March, around the time when US bank failures roiled markets and spurred haven buying in government debt.
Front-end yields have moved higher for 10 straight trading sessions and the latest leg was fueled by increased optimism about a potential debt-ceiling deal and resilient economic data that could pave the way for additional Fed tightening.
Bloomberg 5/26/2023
Federal Reserve Bank of Cleveland President Loretta Mester said she wouldn’t rule out raising interest rates again next month after disappointing progress on inflation.
“Everything is on the table in June,” Mester, who doesn’t vote on rate decisions this year, said Friday in an interview on CNBC. “Inflation is still too high and it’s stubborn.”
Data released earlier Friday showed the personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose a faster-than-expected 0.4% in April and was up 4.4% from a year ago — more than double the central bank’s 2% target.
“The data that came in this morning suggests we have more work to do,” she said.
Mester repeated that she doesn’t think the economy is in a place where it’s equally probable that the next move in the fed funds rate could be an increase or decrease.
Traders fully priced in another quarter-point interest-rate increase by the Federal Reserve within the next two policy meetings and a more than one-in-two chance that hike could arrive as soon as next month.
The shift came as US yields rose, with the policy sensitive two-year rate rising nearly 15 basis points to 4.5%. That’s the highest level since early March, around the time when US bank failures roiled markets and spurred haven buying in government debt.
Front-end yields have moved higher for 10 straight trading sessions and the latest leg was fueled by increased optimism about a potential debt-ceiling deal and resilient economic data that could pave the way for additional Fed tightening.
Bloomberg 5/26/2023
Federal Reserve Bank of Cleveland President Loretta Mester said she wouldn’t rule out raising interest rates again next month after disappointing progress on inflation.
“Everything is on the table in June,” Mester, who doesn’t vote on rate decisions this year, said Friday in an interview on CNBC. “Inflation is still too high and it’s stubborn.”
Data released earlier Friday showed the personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose a faster-than-expected 0.4% in April and was up 4.4% from a year ago — more than double the central bank’s 2% target.
“The data that came in this morning suggests we have more work to do,” she said.
Mester repeated that she doesn’t think the economy is in a place where it’s equally probable that the next move in the fed funds rate could be an increase or decrease.
May 22, 2023
SGH Insight
Powell likely believes the Fed can easily return to rate hikes, but the reality is that once the Fed pauses, inertia will take hold and raise the bar to a rate hike. One way to avoid this is to almost pre-commit to resuming rate hikes in July or September if evidence of substantial softening of demand and inflation does not emerge. That’s the idea of selling a pause as a “skip,” but really the main reason to go down this route is as a compromise to mollify hawks who will no doubt worry that policy inertia will make it difficult to restart rates hikes unless it becomes evident that inflation or growth is getting away from the Fed again.
Governor Waller will be speaking Wednesday. Waller’s speeches have foreshadowed policy outcomes this cycle, but now we have him speaking after what appears to be clear signaling by Powell. Based on Waller’s most recent economic outlook:
“I would welcome signs of moderating demand, but until they appear and I see inflation moving meaningfully and persistently down toward our 2 percent target, I believe there is still work to do.”
I would expect him to be in among the hawks in seeking another rate hike. Assuming that is true, he could muddy the waters and might even be interpreted as “cleaning up” after Powell. I think Powell knew what he was saying, and his performance doesn’t need to be cleaned up.
Market Validation
Powell likely believes the Fed can easily return to rate hikes, but the reality is that once the Fed pauses, inertia will take hold and raise the bar to a rate hike. One way to avoid this is to almost pre-commit to resuming rate hikes in July or September if evidence of substantial softening of demand and inflation does not emerge. That’s the idea of selling a pause as a “skip,” but really the main reason to go down this route is as a compromise to mollify hawks who will no doubt worry that policy inertia will make it difficult to restart rates hikes unless it becomes evident that inflation or growth is getting away from the Fed again.
Governor Waller will be speaking Wednesday. Waller’s speeches have foreshadowed policy outcomes this cycle, but now we have him speaking after what appears to be clear signaling by Powell. Based on Waller’s most recent economic outlook:
“I would welcome signs of moderating demand, but until they appear and I see inflation moving meaningfully and persistently down toward our 2 percent target, I believe there is still work to do.”
I would expect him to be in among the hawks in seeking another rate hike. Assuming that is true, he could muddy the waters and might even be interpreted as “cleaning up” after Powell. I think Powell knew what he was saying, and his performance doesn’t need to be cleaned up.
Santa Barbara County Economic Summit 5/24/2023
One might lean toward hiking by focusing on the economic data and interpreting it to suggest that inflation and economic activity are not consistent with significant and ongoing progress toward the FOMC's 2 percent inflation goal. Based solely on the data we have in hand as of today, we are not making much progress on inflation. If one doesn't believe the incoming data will be much better, one could advocate for another 25-basis-point hike as the appropriate action in June.
Alternatively, one might view the current and incoming data as supporting a hike in June but believe that caution is warranted because there is a high level of uncertainty about how credit conditions are evolving. Another hike combined with an abrupt and unexpected tightening of credit conditions may push the economy down in a rapid and undesirable manner. This possibility is the downside risk of an additional rate hike in the current environment. If one is sufficiently worried about this downside risk, then prudent risk management would suggest skipping a hike at the June meeting but leaning toward hiking in July based on the incoming inflation data. There is a little over a month between the June and July FOMC meetings, and during that time we will learn more about how credit conditions are evolving. Over four months will have passed between the Silicon Valley Bank failure and the July meeting. By then we will have a much clearer idea about credit conditions. If banking conditions do not appear to have tightened excessively, then hiking in July could well be the appropriate policy.
Lastly, one might want to pause hikes at the June meeting, meaning that the target range is at its terminal rate, if the current stance of policy is thought to be enough to bring inflation down over time. Between policy lags and possible tightening credit conditions, the current stance of monetary policy may be seen, at that point, as sufficiently restrictive to move us toward the dual mandate. From this viewpoint, the policy rate is high enough and we simply need to hold it there to bring inflation down toward our 2 percent target.
I do not expect the data coming in over the next couple of months will make it clear that we have reached the terminal rate. And I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2 percent objective.
One might lean toward hiking by focusing on the economic data and interpreting it to suggest that inflation and economic activity are not consistent with significant and ongoing progress toward the FOMC's 2 percent inflation goal. Based solely on the data we have in hand as of today, we are not making much progress on inflation. If one doesn't believe the incoming data will be much better, one could advocate for another 25-basis-point hike as the appropriate action in June.
Alternatively, one might view the current and incoming data as supporting a hike in June but believe that caution is warranted because there is a high level of uncertainty about how credit conditions are evolving. Another hike combined with an abrupt and unexpected tightening of credit conditions may push the economy down in a rapid and undesirable manner. This possibility is the downside risk of an additional rate hike in the current environment. If one is sufficiently worried about this downside risk, then prudent risk management would suggest skipping a hike at the June meeting but leaning toward hiking in July based on the incoming inflation data. There is a little over a month between the June and July FOMC meetings, and during that time we will learn more about how credit conditions are evolving. Over four months will have passed between the Silicon Valley Bank failure and the July meeting. By then we will have a much clearer idea about credit conditions. If banking conditions do not appear to have tightened excessively, then hiking in July could well be the appropriate policy.
Lastly, one might want to pause hikes at the June meeting, meaning that the target range is at its terminal rate, if the current stance of policy is thought to be enough to bring inflation down over time. Between policy lags and possible tightening credit conditions, the current stance of monetary policy may be seen, at that point, as sufficiently restrictive to move us toward the dual mandate. From this viewpoint, the policy rate is high enough and we simply need to hold it there to bring inflation down toward our 2 percent target.
I do not expect the data coming in over the next couple of months will make it clear that we have reached the terminal rate. And I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2 percent objective.
May 17, 2023
SGH Insight
Challenging Fedspeak
This leads me to suspect this next meeting is really not about the data. Sure, maybe some blowout numbers can influence the debate either way, but this meeting is about the ability of the dovish contingent to persuade the Committee that it should pause on the back of the policy lags story. The Fed has been floating the policy lags for months, the now is highlighted by banking stress. It’s getting to be time to fish or cut bait with that story. Either stick with the hawkish position of waiting for the inflation data to roll over, which given that inflation is a lagging indicator raises the risk of a hard landing, or make a play at the soft-landing by pausing while inflation remains elevated. That’s the choice here.
I think the consensus is moving in the direction of the doves. Dovish speakers are obviously emboldened, and I see signs that leadership leans in that direction as well. For example, when I see New York Federal Reserve President John Williams emphasize the lagged effects of policy and that supply and demand are in better balance and moving in the right direction, as he did in his comments to at the University of the Virgin Islands, I hear that he is ready to pause, and I don’t think Williams is going to go off-script. And I hear Federal Reserve Governor Phillip Jefferson giving the same message:
“…my reading of this evidence is that we are "doing what is necessary or expected" of us. Furthermore, monetary policy affects the economy and inflation with long and varied lags, and the full effects of our rapid tightening are still likely ahead of us.”
I think we need to pay attention to Jefferson as he is slated to be the next Vice Chair. He isn’t going to go off-script either.
Market Validation
This leads me to suspect this next meeting is really not about the data. Sure, maybe some blowout numbers can influence the debate either way, but this meeting is about the ability of the dovish contingent to persuade the Committee that it should pause on the back of the policy lags story. The Fed has been floating the policy lags for months, the now is highlighted by banking stress. It’s getting to be time to fish or cut bait with that story. Either stick with the hawkish position of waiting for the inflation data to roll over, which given that inflation is a lagging indicator raises the risk of a hard landing, or make a play at the soft-landing by pausing while inflation remains elevated. That’s the choice here.
I think the consensus is moving in the direction of the doves. Dovish speakers are obviously emboldened, and I see signs that leadership leans in that direction as well. For example, when I see New York Federal Reserve President John Williams emphasize the lagged effects of policy and that supply and demand are in better balance and moving in the right direction, as he did in his comments to at the University of the Virgin Islands, I hear that he is ready to pause, and I don’t think Williams is going to go off-script. And I hear Federal Reserve Governor Phillip Jefferson giving the same message:
“…my reading of this evidence is that we are "doing what is necessary or expected" of us. Furthermore, monetary policy affects the economy and inflation with long and varied lags, and the full effects of our rapid tightening are still likely ahead of us.”
I think we need to pay attention to Jefferson as he is slated to be the next Vice Chair. He isn’t going to go off-script either.
Bloomberg 5/18/2023
Federal Reserve Governor Philip Jefferson suggested he is willing to be patient to see how an aggressive rise in interest rates over the past year filters through the economy, citing the delayed effects of policy and uncertainty around tighter lending standards.
“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates,” Jefferson said Thursday in the text of remarks to the National Association of Insurance Commissioners in Washington.
He said he is uncertain how tighter lending standards resulting from recent turmoil in the banking sector will impact growth. “I intend to consider all these factors in the coming weeks as I contemplate the appropriate stance of monetary policy going forward,” he said.
Jefferson emphasized that inflation is still too high, even though growth is showing signs of slowing.
“Inflation is too high, and we have not yet made sufficient progress on reducing it,” he said. “Outside of energy and food, the progress on inflation remains a challenge.’
President Joe Biden has nominated Jefferson to serve as the Fed Board’s next vice chair. He is awaiting Senate confirmation.
His remarks suggest he is leaning toward a pause to give the monetary restraint in place time to work through the economy. However, he said he is also going to take new data on inflation and the labor market on board over the coming weeks.
Federal Reserve Governor Philip Jefferson suggested he is willing to be patient to see how an aggressive rise in interest rates over the past year filters through the economy, citing the delayed effects of policy and uncertainty around tighter lending standards.
“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates,” Jefferson said Thursday in the text of remarks to the National Association of Insurance Commissioners in Washington.
He said he is uncertain how tighter lending standards resulting from recent turmoil in the banking sector will impact growth. “I intend to consider all these factors in the coming weeks as I contemplate the appropriate stance of monetary policy going forward,” he said.
Jefferson emphasized that inflation is still too high, even though growth is showing signs of slowing.
“Inflation is too high, and we have not yet made sufficient progress on reducing it,” he said. “Outside of energy and food, the progress on inflation remains a challenge.’
President Joe Biden has nominated Jefferson to serve as the Fed Board’s next vice chair. He is awaiting Senate confirmation.
His remarks suggest he is leaning toward a pause to give the monetary restraint in place time to work through the economy. However, he said he is also going to take new data on inflation and the labor market on board over the coming weeks.
May 15, 2023
SGH Insight
If You Don’t Have Time This Morning
The Fed will likely hold rates steady at the June meeting as it weighs the impact of banking stress on credit creation. Still, the Fed retains a hawkish bias, and the risk is that the Fed hikes again. Indeed, I suspect the Fed is happy if market pricing for June reflects this bias. Still, even if the Fed expects another hike is more likely than a cut, and very much doesn’t think it will be cutting rates this year, the risk that the Fed will need to cut rates sharply to stabilize the banking sector dominates market pricing after June. There is little the Fed can do about this situation other than wait for the market to move in its direction.
Market Validation
The Fed will likely hold rates steady at the June meeting as it weighs the impact of banking stress on credit creation. Still, the Fed retains a hawkish bias, and the risk is that the Fed hikes again. Indeed, I suspect the Fed is happy if market pricing for June reflects this bias. Still, even if the Fed expects another hike is more likely than a cut, and very much doesn’t think it will be cutting rates this year, the risk that the Fed will need to cut rates sharply to stabilize the banking sector dominates market pricing after June. There is little the Fed can do about this situation other than wait for the market to move in its direction.
Bloomberg 5/16/2023
One of the Federal Reserve’s more hawkish policymakers suggested it will need to keep raising interest rates, while two others stressed watching the impact of their tightening so far.The remarks on Tuesday by Cleveland Fed President Loretta Mester, New York Fed chief John Williams and Richmond’s Thomas Barkin reveal ongoing internal debate over a pause on rate hikes next month.Investors bet the Fed will hold fire at its June 13-14 meeting as policymakers assess the impact of the five percentage points of rate increases they’ve delivered in little over a year and strains in the banking sector. Federal Reserve Bank of Richmond President Tom Barkin says demand is cooling “but not yet cold” during an interview with Mike McKee on “Bloomberg Markets.”Williams, who is vice chair of the policy-setting Federal Open Market Committee, didn’t spell out what he favored doing next month — but left the impression that he was comfortable with a wait-and-see approach.
Bloomberg 5/19/ 2023
Federal Reserve Chair Jerome Powell gave a clear signal he is open to pausing interest-rate increases next month and said that tighter credit conditions could mean the policy peak will be lower.
“We’ve come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Powell told a Fed conference Friday in Washington. “Having come this far we can afford to look at the data and the evolving outlook to make careful assessments,” he added, reading from prepared notes.
Officials raised rates by a quarter percentage point earlier this month to a target range of 5% to 5.25% and signaled they could pause. They next meet June 13-14.
“While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Powell said. “As a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain,” he said.
One of the Federal Reserve’s more hawkish policymakers suggested it will need to keep raising interest rates, while two others stressed watching the impact of their tightening so far.The remarks on Tuesday by Cleveland Fed President Loretta Mester, New York Fed chief John Williams and Richmond’s Thomas Barkin reveal ongoing internal debate over a pause on rate hikes next month.Investors bet the Fed will hold fire at its June 13-14 meeting as policymakers assess the impact of the five percentage points of rate increases they’ve delivered in little over a year and strains in the banking sector. Federal Reserve Bank of Richmond President Tom Barkin says demand is cooling “but not yet cold” during an interview with Mike McKee on “Bloomberg Markets.”Williams, who is vice chair of the policy-setting Federal Open Market Committee, didn’t spell out what he favored doing next month — but left the impression that he was comfortable with a wait-and-see approach.
Bloomberg 5/19/ 2023
Federal Reserve Chair Jerome Powell gave a clear signal he is open to pausing interest-rate increases next month and said that tighter credit conditions could mean the policy peak will be lower.
“We’ve come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Powell told a Fed conference Friday in Washington. “Having come this far we can afford to look at the data and the evolving outlook to make careful assessments,” he added, reading from prepared notes.
Officials raised rates by a quarter percentage point earlier this month to a target range of 5% to 5.25% and signaled they could pause. They next meet June 13-14.
“While the financial stability tools helped to calm conditions in the banking sector, developments there on the other hand are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Powell said. “As a result our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain,” he said.
May 9, 2023
SGH Insight
The Bank of England (BOE) will likely deliver another widely expected 25 basis-point- hike in its Bank rate this week to 4.50% though less expected is that it might well be its last for the cycle.
Of course, the Bank will not declare it is finished and genuinely views further policy firming to 4.75% at the June 22 meeting as still at least possible. But it will wait for data on wages and inflation to help it better estimate the medium-term inflation threat before it will be willing to call the end point.
Further out the forecast horizon the BOE can see the potential upside inflationary effects of economic tail winds that might require it to push rates beyond 4.50%.
The Bank will release projections Thursday that show an improved trajectory for growth and inflation, but a batch of inflation and wage data due at the end of May will be more consequential for the medium-term picture.
So we expect BOE Governor Bailey to tread water this week with a mixed message that speaks to a positive near term outlook that continues to be clouded by what Governor Andrew Bailey calls the biggest risk “we’ve ever had” over how inflation will track in the medium term.
A vote for a quarter point rate rise this meeting will likely be supported by seven of the nine-member rate setting Monetary Policy Committee (MPC). The two most dovish members, Swati Dhingra and Silvana Tenreyro, will no doubt vote again, to hold the rate steady at 4.50%, just as they did when rates were lifted to 4.25% in March.
Market Validation
Of course, the Bank will not declare it is finished and genuinely views further policy firming to 4.75% at the June 22 meeting as still at least possible. But it will wait for data on wages and inflation to help it better estimate the medium-term inflation threat before it will be willing to call the end point.
Further out the forecast horizon the BOE can see the potential upside inflationary effects of economic tail winds that might require it to push rates beyond 4.50%.
The Bank will release projections Thursday that show an improved trajectory for growth and inflation, but a batch of inflation and wage data due at the end of May will be more consequential for the medium-term picture.
So we expect BOE Governor Bailey to tread water this week with a mixed message that speaks to a positive near term outlook that continues to be clouded by what Governor Andrew Bailey calls the biggest risk “we’ve ever had” over how inflation will track in the medium term.
A vote for a quarter point rate rise this meeting will likely be supported by seven of the nine-member rate setting Monetary Policy Committee (MPC). The two most dovish members, Swati Dhingra and Silvana Tenreyro, will no doubt vote again, to hold the rate steady at 4.50%, just as they did when rates were lifted to 4.25% in March.
Bloomberg 5/11/2023
The Bank of England raised its benchmark lending rate to the highest level since 2008, saying further increases may be needed if inflationary pressures persist. The UK central bank lifted its key rate a quarter point as expected to 4.5%, with two of the nine-member Monetary Policy Committee voting for no change. The majority of the panel said “repeated surprises” pointing to the resilience of the economy have added to price pressures and required action. Officials led by Governor Andrew Bailey also delivered the
biggest upgrade to growth projections since the BOE gained independence in 1997, erasing a recession previously forecast and anticipating the real economy will be 2.25% bigger by mid-2026 than it thought in February.
Bloomberg 5/11/2023
The Bank of England Governor Andrew Bailey said the most aggressive interest rate rises in four decades could be near an end so long as inflation weakens.
“We are approaching a point when we should be able to in a sense rest in terms of the level of rates,” Bailey said Thursday in an interview with Bloomberg TV.
The Bank of England raised its benchmark lending rate to the highest level since 2008, saying further increases may be needed if inflationary pressures persist. The UK central bank lifted its key rate a quarter point as expected to 4.5%, with two of the nine-member Monetary Policy Committee voting for no change. The majority of the panel said “repeated surprises” pointing to the resilience of the economy have added to price pressures and required action. Officials led by Governor Andrew Bailey also delivered the
biggest upgrade to growth projections since the BOE gained independence in 1997, erasing a recession previously forecast and anticipating the real economy will be 2.25% bigger by mid-2026 than it thought in February.
Bloomberg 5/11/2023
The Bank of England Governor Andrew Bailey said the most aggressive interest rate rises in four decades could be near an end so long as inflation weakens.
“We are approaching a point when we should be able to in a sense rest in terms of the level of rates,” Bailey said Thursday in an interview with Bloomberg TV.
April 28, 2023
SGH Insight
Over the last two weeks, a number of European Central Bank officials came out in rapid succession with a message that the Governing Council will decide between a 25 and 50 basis point hike when it convenes next for its monetary policy meeting on Thursday, May 4.
They will, and the decision is highly likely to be 25. Furthermore, we believe there is an almost negligible chance that the Eurozone preliminary April CPI release on May 2, or the bank lending survey results that will be closely scrutinized for signs of further contraction in lending, will change that outcome.
The salvo from ECB hawks to put a 50 on the table should be seen as an attempt to keep the heat on their dovish colleagues to stay the course in fighting still stubbornly high, and broadening, core inflationary pressures, despite market turmoil surrounding financial sector concerns and continued relief on improving headline inflation figures.
Market Validation
They will, and the decision is highly likely to be 25. Furthermore, we believe there is an almost negligible chance that the Eurozone preliminary April CPI release on May 2, or the bank lending survey results that will be closely scrutinized for signs of further contraction in lending, will change that outcome.
The salvo from ECB hawks to put a 50 on the table should be seen as an attempt to keep the heat on their dovish colleagues to stay the course in fighting still stubbornly high, and broadening, core inflationary pressures, despite market turmoil surrounding financial sector concerns and continued relief on improving headline inflation figures.
WSJ 5/4/2023
The European Central Bank increased its key rate by a quarter percentage point on Thursday, shifting to less aggressive monetary policy tightening amid signs that the bank's monthslong campaign against high inflation is starting to bear fruit.
The decision to move more slowly in raising borrowing costs despite persistently high inflation, comes after the Federal Reserve nudged rates higher on Wednesday but signaled a pause in monetary tightening.
Bloomberg 5/4/2023
European Central Bank Governing Council members favoring a half-point interest-rate increase didn’t put up much of a fight even though several were in favor, according to people familiar with the matter.
The fact that the ECB signaled that more tightening is in the pipeline and that reinvestments under the institution’s older bond-purchase program would end helped secure an agreement on Thursday’s 25 basis-point move, the people said, asking not to be identified because such deliberations are private.
The European Central Bank increased its key rate by a quarter percentage point on Thursday, shifting to less aggressive monetary policy tightening amid signs that the bank's monthslong campaign against high inflation is starting to bear fruit.
The decision to move more slowly in raising borrowing costs despite persistently high inflation, comes after the Federal Reserve nudged rates higher on Wednesday but signaled a pause in monetary tightening.
Bloomberg 5/4/2023
European Central Bank Governing Council members favoring a half-point interest-rate increase didn’t put up much of a fight even though several were in favor, according to people familiar with the matter.
The fact that the ECB signaled that more tightening is in the pipeline and that reinvestments under the institution’s older bond-purchase program would end helped secure an agreement on Thursday’s 25 basis-point move, the people said, asking not to be identified because such deliberations are private.
May 2, 2023
SGH Insight
Monday Morning Notes, 5/1/23
If You Don’t Have Time This Morning
The Fed will push policy rates up another notch this week to 5.125%. Although the Fed will likely keep the option for another hike in June open, there is growing pressure from the doves to bring this cycle to an end. The hawks are still trying to keep the Fed on notice that inflation has not yet been vanquished, but they are working against growing concerns of an emerging credit crunch. With policy rates likely in restrictive territory at the end of this meeting, any further moderation in demand or inflation will help make the case that policy is now “sufficiently” restrictive to restore price stability.
... We don’t think the Fed will decisively signal an upcoming pause at the June meeting. We think the tone of the meeting statement and presser will send the signal that policy rates are in restrictive territory but might not yet be sufficiently restrictive to return inflation to 2% over a reasonable time horizon. Given the tendency of the inflation data to surprise the Fed on the upside, Fed Chair Jerome Powell gains little by taking a June hike off the table when he can just lean on the March SEP and say, “seven participants believed in March that rates still needed to move higher, and those projections will be revised in June.” That would put the odds in favor of a pause but leave open a non-trivial probability of a rate hike.
...Any further rate hikes will be heavily dependent on the data flow and the Fed’s assessment of credit conditions. Whereas even last fall one could say that the Fed still had a long way to go before rates were in restrictive territory, that is no longer the case. Appetite for additional rate hikes is waning among FOMC participants, and even the hawks will eventually embrace the policy lags argument. We are likely seeing the last gasps of the hawks as we circle around the end of this cycle.
Market Validation
If You Don’t Have Time This Morning
The Fed will push policy rates up another notch this week to 5.125%. Although the Fed will likely keep the option for another hike in June open, there is growing pressure from the doves to bring this cycle to an end. The hawks are still trying to keep the Fed on notice that inflation has not yet been vanquished, but they are working against growing concerns of an emerging credit crunch. With policy rates likely in restrictive territory at the end of this meeting, any further moderation in demand or inflation will help make the case that policy is now “sufficiently” restrictive to restore price stability.
... We don’t think the Fed will decisively signal an upcoming pause at the June meeting. We think the tone of the meeting statement and presser will send the signal that policy rates are in restrictive territory but might not yet be sufficiently restrictive to return inflation to 2% over a reasonable time horizon. Given the tendency of the inflation data to surprise the Fed on the upside, Fed Chair Jerome Powell gains little by taking a June hike off the table when he can just lean on the March SEP and say, “seven participants believed in March that rates still needed to move higher, and those projections will be revised in June.” That would put the odds in favor of a pause but leave open a non-trivial probability of a rate hike.
...Any further rate hikes will be heavily dependent on the data flow and the Fed’s assessment of credit conditions. Whereas even last fall one could say that the Fed still had a long way to go before rates were in restrictive territory, that is no longer the case. Appetite for additional rate hikes is waning among FOMC participants, and even the hawks will eventually embrace the policy lags argument. We are likely seeing the last gasps of the hawks as we circle around the end of this cycle.
Bloomberg 5/3/2023
The Fed decision is out, and duly entails a 25 bp hike. Notably, the statement omits the comment that “some additional policy firming may be necessary,” noting instead that “the Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time.”
That leaves the door open for more hikes, but it also leaves it open for a pause/end to the cycle.
...Federal Open Market Committee 5/3/2023
CHAIRMAN POWELL: So taking your question, today was the raise the federal fund rate by 25 basis point. A decision on a pause was not made today. You will notice in the statement for March we had a sentence that said the committee anticipates that some additional policy firming may be appropriate. That sentence is not in the statement anymore. We took that out. Instead we are saying that in determining the extent to which policy affirming, the committee will take in to account certain factors. So that's a meaningful change that we we're no longer saying that we anticipate. And so we will be driven by incoming data meeting by meeting and we will approach that question at the June meeting.
...Federal Open Market Committee 5/3/2023:
CHAIRMAN POWELL: That's an ongoing assessment. We are going to need data to accumulate. That would mean we think we've reached that point. It is not possible to say that with confidence now. Nonetheless you will know that the summary of economic projections from the March meeting showed that in -- at that point in time, that the meeting participant thought that this was the appropriate level of the ultimate high level of rates. We don't know that. We'll revisit that at the June meeting.
The Fed decision is out, and duly entails a 25 bp hike. Notably, the statement omits the comment that “some additional policy firming may be necessary,” noting instead that “the Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time.”
That leaves the door open for more hikes, but it also leaves it open for a pause/end to the cycle.
...Federal Open Market Committee 5/3/2023
CHAIRMAN POWELL: So taking your question, today was the raise the federal fund rate by 25 basis point. A decision on a pause was not made today. You will notice in the statement for March we had a sentence that said the committee anticipates that some additional policy firming may be appropriate. That sentence is not in the statement anymore. We took that out. Instead we are saying that in determining the extent to which policy affirming, the committee will take in to account certain factors. So that's a meaningful change that we we're no longer saying that we anticipate. And so we will be driven by incoming data meeting by meeting and we will approach that question at the June meeting.
...Federal Open Market Committee 5/3/2023:
CHAIRMAN POWELL: That's an ongoing assessment. We are going to need data to accumulate. That would mean we think we've reached that point. It is not possible to say that with confidence now. Nonetheless you will know that the summary of economic projections from the March meeting showed that in -- at that point in time, that the meeting participant thought that this was the appropriate level of the ultimate high level of rates. We don't know that. We'll revisit that at the June meeting.
April 18, 2023
SGH Insight
With Japan’s wages continuing to lag prices and core CPI likely to slow to 1.6% over the next year, newly minted Bank of Japan (BOJ) governor Kazuo Ueda will be looking beyond his first meeting on April 27-28 to change policy.
The upcoming forecast round by the BOJ will feature fresh quarterly growth and inflation forecasts extending through fiscal 2025.The update may plot a path back to the 2% goal in 2025.
The BOJ expects Japan’s current 3% inflation rate to slow to below its 2% target in the latter half of this coming fiscal year.
CPI data due out April 21 is expected to show core inflation around 3%, little changed from February and with global growth set to pick up after a period of slowdown, and Japan’s wages to continue to rise.
Against that backdrop Ueda is eying an appropriate time to make a move on exiting the BOJ’s yield curve operations.
The sequence will likely be a tweak to yield curve control (YCC) in June as the technocrats simultaneously work on a framework that allows them to review, and then exit YCC, altogether thereafter.
The BOJ’s rates outlook is an entirely different contemplation, and we don’t see the BOJ raising its official rate this year.
Market Validation
The upcoming forecast round by the BOJ will feature fresh quarterly growth and inflation forecasts extending through fiscal 2025.The update may plot a path back to the 2% goal in 2025.
The BOJ expects Japan’s current 3% inflation rate to slow to below its 2% target in the latter half of this coming fiscal year.
CPI data due out April 21 is expected to show core inflation around 3%, little changed from February and with global growth set to pick up after a period of slowdown, and Japan’s wages to continue to rise.
Against that backdrop Ueda is eying an appropriate time to make a move on exiting the BOJ’s yield curve operations.
The sequence will likely be a tweak to yield curve control (YCC) in June as the technocrats simultaneously work on a framework that allows them to review, and then exit YCC, altogether thereafter.
The BOJ’s rates outlook is an entirely different contemplation, and we don’t see the BOJ raising its official rate this year.
Bloomberg 4/28/23
The yen fell and government bond futures
reversed losses after the Bank of Japan said it would maintain
its ultra-loose monetary policy but announced a review, in its
first meeting under new governor Kazuo Ueda.
The yen weakened 0.7% against the dollar to 134.90, while
government bond futures reversed losses to trade higher.
Japanese bank shares fell. The central bank will keep its 0.5%
ceiling for 10-year government bond yields and maintain its
short-term policy rate at minus 0.1%, it said.
The BOJ will conduct a “broad-perspective review” of
policy, with a planned time frame of around one to one-and-a-
half years. It scrapped its guidance on future interest rate
levels.
The yen fell and government bond futures
reversed losses after the Bank of Japan said it would maintain
its ultra-loose monetary policy but announced a review, in its
first meeting under new governor Kazuo Ueda.
The yen weakened 0.7% against the dollar to 134.90, while
government bond futures reversed losses to trade higher.
Japanese bank shares fell. The central bank will keep its 0.5%
ceiling for 10-year government bond yields and maintain its
short-term policy rate at minus 0.1%, it said.
The BOJ will conduct a “broad-perspective review” of
policy, with a planned time frame of around one to one-and-a-
half years. It scrapped its guidance on future interest rate
levels.
March 14, 2023
SGH Insight
The EU treaty benchmarks of 3% of GDP for deficit and 60% of GDP for debt remain unchanged. Gone, however, is the old and now unrealistic rule that governments running debt levels above 60% of GDP should reduce it by 1/20th of the excess above 60% every year as an average over 3 years.
Now, a country with excessive debt will get four years to put debt on a downward path on which it is supposed to continue for the next 10 years. If there are reforms and investment, or debt is particularly high, the country can get seven years to put the debt on a declining trajectory, which is also supposed to continue to fall for a decade afterwards.
The debt reduction paths would be set jointly by the Commission (which would prepare a technical debt analysis) and each government, with the focus on setting annual limits on net primary expenditure, which excludes one-offs, cyclical unemployment spending, and debt servicing costs. This does away with the focus on the notorious structural balance that finance ministers dislike because it is not observable, and subject to major revisions, making it a nightmare upon which to base real time spending decisions.
Market Validation
Now, a country with excessive debt will get four years to put debt on a downward path on which it is supposed to continue for the next 10 years. If there are reforms and investment, or debt is particularly high, the country can get seven years to put the debt on a declining trajectory, which is also supposed to continue to fall for a decade afterwards.
The debt reduction paths would be set jointly by the Commission (which would prepare a technical debt analysis) and each government, with the focus on setting annual limits on net primary expenditure, which excludes one-offs, cyclical unemployment spending, and debt servicing costs. This does away with the focus on the notorious structural balance that finance ministers dislike because it is not observable, and subject to major revisions, making it a nightmare upon which to base real time spending decisions.
Bloomberg 4/26/2023
Highly-indebted European Union countries are to get more leeway in reducing public debt to enable needed investments under reform plans proposed by the European Commission on Wednesday.
Under Wednesday's proposal, countries would still be obliged to reduce their debt to 60% of their economic output in the long-term and limit their deficit to 3% of gross domestic product (GDP). Individual expenditure plans however are to allow countries with excessive debt and deficits more time and flexibility. Countries would be given four years to get their deficit below the 3%-threshold and reduce debt by 0.5% of GDP per year, a commission press release said. Monitoring the implementation of the plans is to be simplified, while violations are to be sanctioned more easily to enhance accountability.
Highly-indebted European Union countries are to get more leeway in reducing public debt to enable needed investments under reform plans proposed by the European Commission on Wednesday.
Under Wednesday's proposal, countries would still be obliged to reduce their debt to 60% of their economic output in the long-term and limit their deficit to 3% of gross domestic product (GDP). Individual expenditure plans however are to allow countries with excessive debt and deficits more time and flexibility. Countries would be given four years to get their deficit below the 3%-threshold and reduce debt by 0.5% of GDP per year, a commission press release said. Monitoring the implementation of the plans is to be simplified, while violations are to be sanctioned more easily to enhance accountability.
February 14, 2023
SGH Insight
We think the Fed will need to raise the terminal rate, and market participants increasingly think the same. Markets have priced in a roughly 50% chance of a June rate hike. This helps the Fed in that it puts upward pressure on long rates, but only if the Fed follows the markets. We remind readers that while the Fed acknowledges it could continue to hike rates, it has not yet concluded that it needs to guide the terminal rate higher. I think the Fed does not want to raise rates past 5.125%, it leans toward the idea that “longer for higher” will be good enough and sees the SEP inflation forecast as “aspirational” in that, although unsaid, it thinks it can settle for an optimal control-type outcome with ongoing elevated inflation (see our Monday 2/13/22 note). All that said, we think stronger growth will eventually force the Fed’s hand, and we look forward to this week’s numbers on housing and retail sales to see if they will fall in line with our expectations.
Market Validation
Bloomberg 2/15/ 23
US retail sales rose in January by the most in nearly two years, signaling robust consumer demand that could bolster the Federal Reserve’s resolve to keep raising interest rates in the face of persistent inflation.
The value of overall retail purchases increased 3% in a broad advance — the most since March 2021 — after a 1.1% drop in the prior month, Commerce Department data showed Wednesday. Excluding gasoline and autos, retail sales rose 2.6%, also the biggest increase in nearly two years. The figures aren’t adjusted for inflation.
The median estimate in a Bloomberg survey of economists called for a 2% advance in total retail sales.
All 13 retail categories rose last month, led by motor vehicles, furniture and restaurants. The report showed vehicle sales climbed 5.9% in January. The value of sales at gasoline stations were unchanged.
The report showed US consumers got off to a good start in 2023, rebounding from a spending slowdown at the end of last year. A resilient labor market marked by historically low unemployment and solid wage gains has allowed many Americans to keep spending on goods and services even as borrowing costs rise and inflation remains elevated.
US retail sales rose in January by the most in nearly two years, signaling robust consumer demand that could bolster the Federal Reserve’s resolve to keep raising interest rates in the face of persistent inflation.
The value of overall retail purchases increased 3% in a broad advance — the most since March 2021 — after a 1.1% drop in the prior month, Commerce Department data showed Wednesday. Excluding gasoline and autos, retail sales rose 2.6%, also the biggest increase in nearly two years. The figures aren’t adjusted for inflation.
The median estimate in a Bloomberg survey of economists called for a 2% advance in total retail sales.
All 13 retail categories rose last month, led by motor vehicles, furniture and restaurants. The report showed vehicle sales climbed 5.9% in January. The value of sales at gasoline stations were unchanged.
The report showed US consumers got off to a good start in 2023, rebounding from a spending slowdown at the end of last year. A resilient labor market marked by historically low unemployment and solid wage gains has allowed many Americans to keep spending on goods and services even as borrowing costs rise and inflation remains elevated.
April 13, 2023
SGH Insight
Economic activity in China picked up in March, leading us to pencil in a Q1 2023 GDP year-on-year growth rate that could come in with a 4% handle, above consensus analyst expectations. Furthermore, economic planners in Beijing expect momentum to carry through to a Q2 GDP growth rate of as high as 8%, even if that figure will be heavily boosted by weak year-on-year comparisons to Q2 2022 (see SGH 4/10/23; “China: A ‘Fast Lane’ Recovery”).
Market Validation
Bloomberg 4/18/2023
China’s economy grew at the fastest pace in a year in the first quarter, putting Beijing on track to meet
its growth goal for the year without adding major stimulus, while also helping to cushion the global economy against a downturn.
Gross domestic product expanded 4.5% last quarter from a year earlier, official data showed Tuesday, beating economists’ expectations.
China’s economy grew at the fastest pace in a year in the first quarter, putting Beijing on track to meet
its growth goal for the year without adding major stimulus, while also helping to cushion the global economy against a downturn.
Gross domestic product expanded 4.5% last quarter from a year earlier, official data showed Tuesday, beating economists’ expectations.
April 13, 2023
SGH Insight
Quick Notes Heading into Friday
Federal Reserve Governor Christopher Waller is on the calendar tomorrow. Waller is also on the calendar for next week ahead of the blackout period, but he likely has enough information at this point to provide guidance for the May FOMC meeting, and tomorrow’s topic is the economic outlook, a good opportunity to provide that guidance. As of today, market participants have 70% odds of a rate hike, and Waller can push back on that if he wants. I don’t think he will.
As a reminder, this is what Waller was thinking prior to the SVB collapse:
Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4 percent. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.
This was a two-part test. If job creation fell AND CPI inflation moderated significantly, then the projected terminal rate could remain at 5.1 to 5.4% rather than be revised higher in March. Of course, SVB changed that, but the overall first quarter job growth came in at a faster pace than the fourth quarter, and while there has been improvement in headline inflation, core inflation remains quite elevated.
By his test, absent SVB there would still be room to raise the expected terminal rate. Now, I don’t expect him to say that post SVB, and Fed officials don’t need to make any decisions about the terminal rate until June. But he can say that banking stress has eased and reaffirm the March SEP, which like in December has a projected terminal rate range of 5.1 to 5.4%. That would point toward another rate hike in May and a possible hike in June. I mention the latter because that’s not on anybody’s radar.
Market Validation
Federal Reserve Governor Christopher Waller is on the calendar tomorrow. Waller is also on the calendar for next week ahead of the blackout period, but he likely has enough information at this point to provide guidance for the May FOMC meeting, and tomorrow’s topic is the economic outlook, a good opportunity to provide that guidance. As of today, market participants have 70% odds of a rate hike, and Waller can push back on that if he wants. I don’t think he will.
As a reminder, this is what Waller was thinking prior to the SVB collapse:
Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4 percent. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.
This was a two-part test. If job creation fell AND CPI inflation moderated significantly, then the projected terminal rate could remain at 5.1 to 5.4% rather than be revised higher in March. Of course, SVB changed that, but the overall first quarter job growth came in at a faster pace than the fourth quarter, and while there has been improvement in headline inflation, core inflation remains quite elevated.
By his test, absent SVB there would still be room to raise the expected terminal rate. Now, I don’t expect him to say that post SVB, and Fed officials don’t need to make any decisions about the terminal rate until June. But he can say that banking stress has eased and reaffirm the March SEP, which like in December has a projected terminal rate range of 5.1 to 5.4%. That would point toward another rate hike in May and a possible hike in June. I mention the latter because that’s not on anybody’s radar.
Bloomberg 4/14/2023
Federal Reserve Governor Christopher Waller said he favored more monetary policy tightening to reduce
persistently high inflation, although he said he was prepared to adjust his stance if needed if credit tightens more than expected.
“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday in a speech in San Antonio, Texas. “How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”
Federal Reserve Governor Christopher Waller said he favored more monetary policy tightening to reduce
persistently high inflation, although he said he was prepared to adjust his stance if needed if credit tightens more than expected.
“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said Friday in a speech in San Antonio, Texas. “How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”
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