Will the Fed deliver a third 0.75 percentage point hike?
The US Federal Reserve is widely expected to announce a third consecutive 0.75 percentage point rate hike at the conclusion of its September monetary policy meeting, which ends on Wednesday.
The Fed has been raising interest rates at a brisk pace in recent months in an attempt to stem price growth, which remains near 40-year highs. Economists had expected consumer prices to fall from July on the back of August’s drop in gasoline prices, but data released last Tuesday showed a slight rise, suggesting the Fed still has more work to do.
Following the inflation data, investors began betting on the possibility of a full percentage point hike, although the likelihood of that remains slim given the Fed’s consistent reporting of a 0.75 percentage point move over the past few weeks.
The Fed is also set to release its “dot plot,” or summary of economic forecasts, on Wednesday, showing where the median of Fed officials see interest rates, inflation, unemployment and gross domestic product over the next few years. Significant changes in expectations are expected.
The last scatter chart was released in June and suggested that inflation, measured by core personal consumption spending, would be 4.3 percent by the end of 2022 and 2.7 percent by the end of 2023. Core PCE for July was 4.6 percent.
The June points indicated that interest rates would stand at 3.4 percent by the end of 2022 and 3.8 percent by the end of 2023. Currently, the futures market expects rates to end the year at 4.2 percent, peaking at 4.5 percent in March 2023, and falling to 4 percent by the end of 2023. Kate Duguid
Will the BoJ stick to its ultra-loose policy?
The Bank of Japan is expected to maintain its ultra-loose monetary policy as market participants focus on whether the authorities will intervene directly to stem the yen’s plunge to a new 24-year low.
The policy meeting follows a tense week in which BoJ officials called forex traders to inquire about market conditions in what they called a rate check, highlighting the government’s concerns about the yen’s sharp fall against the US dollar. In the past, such controls preceded Treasury intervention to control the exchange rate.
However, the pressure on the yen is unlikely to affect the BoJ’s monetary policy, as its governor Haruhiko Kuroda has repeatedly argued that it must maintain its stance until wages and inflation rise “in a stable and consistent manner”.
Most economists expect Kuroda to stay the course until the end of his term in April next year. The only change expected is for the BoJ to confirm the end of a program it set up to offer cheap credit to banks financing small and medium-sized businesses during the Covid-19 downturn.
“We expect the BoJ to keep monetary policy unchanged. . . It has maintained its stance that monetary policy is not targeting foreign exchange amid the yen’s sharp depreciation against the dollar,” said Kiichi Murashima, economist at Citigroup Japan.
The Fed, Bank of England and Swiss National Bank are expected to hike rates this week, widening a divergence in global yields that has been pushing the Japanese currency lower. Kana Inagaki
Will the BoE hike rates for the seventh consecutive month?
The BoE is expected to tighten further at next meeting on Thursday as it deals with inflation rates some five times above its 2 percent target.
The central bank has hiked rates for the past six straight meetings, accelerating its pace in August with a 0.5 percentage point hike. The average forecast by economists in a Reuters poll is another half a percentage point hike, although some are expecting a particularly large 0.75 percentage point rise in the federal funds rate.
The annual pace of inflation in the UK eased to 9.9% in August from 10.1% in the previous month, but core inflation, which excludes food and energy, rose 0.1 percentage point to 6.3%.
“The acceleration in core business combined with ongoing services inflation remains a notable concern – one which we believe is likely to reinforce the need for further ‘strong’ action by the US [Monetary Policy Committee]said Benjamin Nabarro, economist at Citi.
Some economists are also arguing that the energy support package introduced earlier this month and tax cuts expected to be announced with the budget will help limit the hit of rising gas prices on businesses and consumers, but they could also mean higher interest rates for longer.
Prime Minister Liz Truss’ energy market intervention — particularly when combined with significant tax cuts — could keep spending growth too high, said Kallum Pickering, an economist at investment bank Berenberg. “While such fiscal interventions will ease near-term pain for consumers and lower peak inflation, they tilt the risks to our medium-term inflation calls,” he added. Valentina Romei