The Fed, Bank of England and ECB: monetary policy decisions
Updated: Dec 13, 2022
With three important central bank meetings this week – the Fed (Weds), the Bank of England (Thurs) and the ECB (Thurs) – the primer below might be useful so you can understand the context.
Conveniently, all three central banks are expected to raise their overnight bank rights by 50bps. My assessment is that the Fed increase is more or less baked in, whilst there is a slight downside bias toward a smaller rate rise (i.e. 25bs) in the U.K. and/ or Eurozone although I don’t think either the BoE or ECB has much latitude to deliver this more modest increase given the inflation rates in both economic zones.
The table below provides further context on the yield complex of the three zones – the US, the UK and the Eurozone.
Further info, US/Fed
Equity markets in the US, which were positive yesterday (Dec 12) after a strong finish, are anticipating a 50bps increase in the Fed Funds rate and are “pricing in” market-neutral comments following the FOMC meeting from Mr Powell and other Fed officials on Wednesday. It is always the post-FOMC decision that seems most open to interpretation and can shift sentiment quickly either way, so my advice is to listen carefully.
It is worth noting that at the September FOMC meeting – the last time that projections were provided (see here) – the Fed members put forth the following economic data points for the years ended 2023, 2024 and 2025 (using medians except for Federal Funds which is central tendency range).
I expect the Federal Reserve will update these projections at the FOMC meeting starting today.
Bloomberg’s recent survey of economists suggest that the Fed Funds rate will increase to 4.9% (so 4.76% – 5.00% range) in 2023 and will remain there the entire year, until mid-2024 when the rate will fall to 4%, and then to 3.5% by the end of 2024. The table below from Bloomberg illustrates the expected trajectory.
CPI release today (pre-open)
Don’t forget that there is a CPI print this morning before the US open (BLS link here). I doubt this will affect the likely +50bps increase in the Fed Funds rate, but it certainly could alter perceptions on the future trajectory of rate increases, and more specifically the terminal rate and the amount of time the terminal rate remains effective in order to tame inflation before the Fed begins to ease. Right now as mentioned already, the Fed is not expected to lower the Fed Funds rate until mid-2024, and equities probably (or hopefully) have this sort of trajectory priced in.