THE DIRECTION OF RATES – December Central Bank Monetary Policy Meetings

US FEDERAL RESERVE – 12/13/23 FOMC

FOMC STATEMENT & SEP ANALYSIS:

The Fed left rates unchanged at 5.25-5.5%, made dovish tweaks to its statement, whilst indicating

a greater fall than many had expected to its Fed rate projections.

• • Fed softened its guidance, whereby it stated that in determining the extent of “ANY” additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. 
  • Fed also stated that inflation has eased over the past year but remains elevated, while it maintained its language that tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation.
  • The 2024 median rate dot was dropped to 4.6% from the prior 5.1%, beneath the analyst consensus 4.9%, indicating three cuts from current levels in 2024. The uncertainty remains high, however, with eight out of 19 officials forecasting rates above the median and five beneath it with a forecast range of 3.9–5.4%.
  • The 2025 median Dot was dropped to 3.6% from 3.9%, whilst the 2026 and long run dots were left unchanged at 2.9% and 2.5%, respectively, bucking some expectations for an upward drift in the longer run (‘neutral’) estimate.
  • The lower rate projections were reflective of faster progress than previously anticipated for inflation, with the Core PCE projections falling to 3.2% from 3.7% for 2023, to 2.4% from 2.6% in 2024, and to 2.2% from 2.3% for 2025.
  • The unemployment rate forecasts were unchanged through 2025 (4.1% in both 2024 and 2025), while the 2024 GDP forecast nudged lower to 1.4% from 1.5% in 2024. The statement saw its tightening guidance softened, “in determining the extent of ANY [new word] additional policy firming that may be appropriate…”, whilst it also maintained its language added in November describing financial and credit conditions as tighter, despite some expectations that it would be removed after a rally in USTs and stocks since then. 
  • It noted growth had slowed from the strong pace in Q3 (prev. expanded at a strong pace in Q3), while it also added that inflation has eased over the past year, but maintained language it remains elevated.

POWELL PRESSER:

Chair Powell declared in his presser that the Fed believes policy is at or near its peak, caveating that the Fed has been surprised in the past and is prepared to tighten policy further if appropriate. He said policy will be kept restrictive until the Fed is confident it’s on the path to 2% inflation.

• • He noted inflation has eased without a significant rise in unemployment, with the usual caveats that inflation is still too high with a long way to go to target. He echoed his Spelman College appearance by bringing in the line that policy has been moved “well into restrictive territory” into his prepared remarks.
  • Powell still believes more tightening is in the pipeline via lags, saying the full effects of tightening “have yet to be felt”. He reiterated prior commentary on the labour market, saying it remains tight but coming into better balance, which policymakers expect to continue, putting further downward pressure on prices.
  • Ahead of Core PCE on Dec 22nd, Powell said the Fed expects a print of 3.1% Y/Y, but added that the Fed thinks it will take some time to bring inflation down to the 2% target.
  • “inflation has eased without a significant rise in unemployment but reiterated inflation is still too high and they are fully committed to returning inflation to 2%, while he reiterated that policy is well into restrictive territory and full effects of tightening are likely not yet felt with the Fed proceeding carefully, given how far they have come.” 
  • Powell also said the Fed believes the policy rate is at or near its peak and is prepared to tighten policy further if appropriate, while it will keep policy restrictive until the Fed is confident on the path to 2% inflation. Furthermore, he noted the Fed added the word “any” to show the Fed thought they are at or near the peak for rates and repeated that participants did not want to take the possibility of further hikes off the table.

Q&A:

• • Powell announced that policymakers think they have done enough on rates. He said it is not likely the Fed will hike further, but caveated the Fed is not fully confident in that view yet.
  • Meanwhile, when asked about rate cuts, Powell said they are beginning to come into view and are now a topic of discussion, saying the timing of cuts were also discussed (he said they were not even being considered at the November FOMC).
  • He added that there was a general expectation that cuts would be a topic of conversation going forward.
  • After Waller made the case the other week for cuts in the coming months if real rates continued drifting higher amid the decline in inflation, Powell said that the Fed is very conscious of real rates and it is a part of how it thinks about things.
  • The Fed Chair made the point that the reason you would not wait to achieve 2% inflation to cut rates is that it would be too late for the economy, saying the Fed needs to reduce the restriction on the economy well before 2%, or they would overshoot.
  • On a soft landing, Powell said he has always felt there was a possibility the economy could avert a recession while inflation came down, and so far that is what they are seeing, saying there is little basis for thinking the economy is in a recession right now. He added that while stronger growth will be good, it will mean it takes longer to get inflation down, suggesting the Fed could have to keep rates higher for longer or hike again due to above-trend growth.
  • Powell noted they had seen real progress on core inflation, whilst saying they had made reasonable progress in non-housing services inflation. On the neutral rate, Powell said the Fed does not know if it has risen. And on the balance sheet, he said the runoff has been working pretty much as expected with reserves not at levels where they would need to slow or stop the runoff, highlighting that the policy rate and balance sheet are on different tracks.

• • Fed Chair Powell stated in the Q&A that the Fed is still focused on the question of whether rates are high enough and it is not likely the Fed will hike further, but the Fed does not take that possibility off the table. 
  • Powell noted policymakers are thinking and talking about when it will be appropriate, while he stated as rate cuts begin to come into view it is now a topic of discussion. 
  • Powell also noted that many mentioned their rate forecasts and the Fed discussed the timing of rate cuts at the meeting, while there was a general expectation that rate cuts will be a topic of conversation going forward. Furthermore, he said discussion on when to cut rates is still ahead and they will decide very carefully, as well as noted that the reason you would not wait to 2% inflation to cut rates is it would be too late and would overshoot, while they need to reduce restriction on the economy well before 2%, as it takes a while for policy to get into the economy.

EUROPEAN CENTRAL BANK – 12/14/23 ECB

As expected, the ECB opted to stand pat on rates for a second consecutive meeting with the main policy adjustment coming via the balance sheet.

• • The Governing Council has decided that reinvestments under PEPP will run at current levels during H1, (vs. previous guidance of at least until the end of 2024), after which, it intends to reduce the PEPP portfolio by EUR 7.5bln per month on average.
  • Elsewhere, the statement reiterated that “policy rates will be set at sufficiently restrictive levels for as long as necessary”.
  • However, the policy statement omitted the prior judgement “inflation is still expected to stay too high for too long”.
  • The accompanying macro projections saw 2023 inflation downgraded to 5.4% from 5.6%, 2024 cut to 2.7% from 3.2% and 2025 held at 1.9%.
  • Note, the forecasts drew criticism in some quarters given the November 23rd cut-off date, which has prompted suggestions that the 2024 core inflation projection of 2.7% is too high given recent economic developments.
  • On the growth front, 2023 and 2024 projections were cut with GDP next year seen at just 0.8% with the 2025 forecast held steady at 1.5%.
  • At the follow-up press conference, when questioned on the Bank’s plans for rate cuts next year, Lagarde stated the decisions will be data dependent, not time dependent, adding that policymakers will not let their guard down.
  • Furthermore, Lagarde was clear in stating that the Governing Council did not discuss rate cuts this week with policy set for a “plateau of hold”.
  • ECB president Lagarde also noted that the Bank will need to see more evidence on wage growth given that current data shows that wages are “not declining”.
  • When questioned on the balance sheet, the President noted that there were differing views on PEPP whereby some governors wanted different tapering, earlier or later.
  • Overall, market pricing has moved in a hawkish direction with a March hike now seen at circa 60% vs. 80% pre-announcement and 147bps of cuts seen by the end of next year vs. circa 160bps.
  • In wake of the meeting, Bloomberg sources suggested the ECB is largely united on forecasting rate cuts later than what markets are expecting.
  • The sources also added that officials do not expect to revise their stance before March, when the ECB will receive an update on the outlook for growth and inflation.
  • ECB is largely united on forecasting rate cuts later than market bets, according to Bloomberg.

BANK OF ENGLAND – 12/14/23 BOE

As expected, the MPC opted to stand pat on rates for a third consecutive meeting via a 6-3 vote with hawkish dissent once again from Greene, Haskel and Mann.

• • The decision to stand pat on rates was based on the judgement that although “some of the news in key data had been to the downside since the MPC’s previous decision, economic developments had been relatively limited overall”.
  • Overall, the key takeaway from the release, however, was the decision to maintain the phrase that policy will need to be restrictive for an “extended” period of time; some desks have touted an outside chance of a softening of this language.
  • Furthermore, it remains the case that further tightening would be required if there were evidence of more persistent inflation pressures.
  • Indeed, some of the language within the minutes leaned hawkishly by noting that “it was too early to conclude that services price inflation and pay growth were on a firmly downward path.”
  • That being said, the inflation path was somewhat lower than projected in November, reflecting softer energy prices.
  • Elsewhere, the MPC judges that the November Fiscal Plan will boost GDP by 0.25% in the coming years.
  • In response to the announcement, pricing has shifted hawkishly from 114bps of cuts priced across 2024 to 107bps, with the first cut pushed back to June from May beforehand, with a May cut priced at 80% implied probability and a March cut falling to less than 30% implied vs 40%. ING concludes that it expects wage growth and services inflation to fall to 4% next year, setting the BoE up for an August rate reduction.

SWISS NATIONAL BANK – 12/14/23 SNB

Largely as expected from the SNB with the key rate maintained at 1.75% and the emphasis on selling foreign currency removed:

• • Most pertinently, the inflation forecasts have seen relatively modest downward adjustments and while this does see CPI within the 0-2% band for 2024 as a whole, inflation is still seen rising in Q2/Q3-2024; though, this is now to just the top of the band, rather than September’s guidance for it to eclipse it.
  • Overall, the statement still holds the assessment that “uncertainty remains high” around inflation and as such has not guided us towards the direction of the next move, merely stating they remain ready to adjust policy as necessary.
  • Given this, participants will remain focused on upcoming inflation prints for insight into the development of the rental rate of inflation.
  • From the press conference, Chairman Jordan underscored the FX tweak and more pertinently said that December’s discussion did not cover rate reductions and that further ahead the current forecasts do not see any tightening. In short, the SNB is barring a marked upward shock seemingly at the policy peak and the timing for a first rate-cut will likely be driven by the assessment/observation of inflation across Q2/Q3-2024, where it is forecast to rise to 2.0% once again.

OTHER CENTRAL BANKS – 12/14/23

NORGES BANK

Norges Bank defied consensus by triggering the hike that they flagged in November’s meeting as “likely” to occur in December.

• • However, consensus was for unchanged, given the development of inflation and growth since then and the optionality at that meeting to leave rates unchanged if “the Committee becomes more assured that underlying inflation is on the decline”.
  • December’s hike appears to have been spurred by the NOK; (marked recent currency depreciation was the sole factor in favor of a hike in the run-up to the announcement). Interestingly, the repo path and statement do not rule out further tightening.
  • However, given the recent pivot from the Fed and pronounced market pricing for global easing, today’s 4.50% rate is likely the peak. The subsequent press conference from Governor Bache added little.

BANXICO

The Banxico left rates unchanged as expected at 11.25%, however, it was received hawkishly by giving away little signal on future rate cuts as it maintained guidance that rates need to stay at the current level for some time.

• • It maintained its view that inflation risks are biased to the upside, and it raised several of its inflation forecasts, with the 2024 headline and core inflation being lifted, as was the Q4 core inflation view.
  • The decision was unanimous.
  • The statement also acknowledged that headline inflation increased slightly, but core inflation continued to decrease and noted the disinflation process is expected to continue. But current forecasts incorporate a more gradual decline in both food merchandise inflation and services inflation.
  • Banxico acknowledged that, for this reason, their forecasts for headline and core inflation have been revised upwards for some quarters.
  • Nonetheless, Banxico is expected to start cutting rates, perhaps in Q1 2024, joining LatAm peers and also after the Dovish Fed twist on Wednesday.
  • However, when Banxico officials have spoken on rate cuts, many have alluded to it being non-consecutive, and only gradual – the minutes on Jan 4th will be eyed for more clues on the timing of rate cuts.