It’s Central Banks Week, and it’s the final one of the year! The Federal Reserve (Fed) is holding a meeting with widespread anticipation that interest rates will stay unchanged at the highest level in 22 years since July.
Fed’s Chair Jerome Powell is facing a delicate task of maintaining flexibility in the U.S. central bank’s policy plans, despite intense pressure to disclose when and to what extent he plans to cut interest rates next year.
There is a general expectation that the Federal Open Market Committee (FOMC) will maintain the federal funds rate at 5.25 percent – 5.5 percent. The Fed has been pausing since July.
However, the monetary policymakers are not yet ready to fulfill the market’s desires and publicly declare that interest rates have reached a sufficiently restrictive level to bring inflation down to their target of 2 percent. They are also not prepared to provide more detailed discussions about the circumstances under which borrowing costs will be reduced next year.
Powell’s challenge this week is that financial markets are not taking his warnings seriously that further tightening of monetary policy is still a possibility. Investors believe that the largest economy in the world is already slowing down enough to avoid the need for more rate hikes. They are also convinced that the incoming data will compel the Fed to cut interest rates sooner than initially expected.
Consumer Price Index
On the day preceding the policy announcement by the FOMC, the latest Consumer Price Index (CPI) data was released, indicating an expected 0.1 percent year-on-year increase in inflation for November.
The core consumer price index, which excludes volatile elements, showed a 0.2 percent monthly increase, consistent with the rise observed in October.
This data arrives at a time when there is unlikely to be any significant change in demand for December. However, it could influence market expectations regarding future monetary easing by the Fed. The market forecast currently suggests a projection of 125 basis points in interest rate cuts for 2024.
Powell recently acknowledged that inflation was still considerably above the target but acknowledged its recent decline, indicating a positive direction. However, he emphasized the need for further progress and maintained the option to resume raising interest rates if the situation demanded it.
European Central Bank
The European Central Bank (ECB) is scheduled to hold its meeting on December 14, with expectations that it will keep interest rates unchanged for the second consecutive meeting.
According to Goldman Sachs, ECB is anticipated to reduce interest rates by 25 basis points at each meeting starting from April next year.
Economists predict that the ECB’s deposit rate will decrease to 2.25 percent by early 2025 from its current level of 4 percent.
“We view April as somewhat more likely given our expectation for firmer growth, the ongoing strength in wage growth and more data to confirm the slowdown in underlying inflation,” the economists said.
Bank of England
The Bank of England (BoE) is set to reveal its forthcoming monetary policy decision on Thursday, amidst divergent views between policymakers and the market regarding interest rate expectations.
Economists anticipate a relatively stable conclusion to an eventful year for borrowing costs, with a high likelihood that the BoE will maintain interest rates unchanged for the third consecutive time. The Monetary Policy Committee (MPC) has held interest rates steady in the September and November meetings, influenced by a significant deceleration in inflation.
Previously, BoE had been steadily raising interest rates in 14 consecutive meetings, reaching a peak of 5.25 percent. However, the current focus is on which bank will be the first to implement an interest rate cut.
Market indicators suggest that traders anticipate this initial move to occur in June, following the decisions made by either the Fed or the ECB, as reported by Bloomberg.
While this sequence of events may be pleasing to BoE officials, allowing them to portray themselves as the first to enter and the last to exit the global interest rate cycle, the reality of implementing three rate increases next year is unlikely to satisfy them. This is especially true given the current circumstances of companies restraining employment and wages, and families facing challenging conditions.
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