Labour has begun to set out its agenda
A March rate cut is “unlikely”
Falling French and German inflation encourage rate-cut hopes
Insolvencies are “sucking the life” out of the economy
It is highly unlikely that Andrew Bailey and his colleagues will take that advice since they remain concerned about a flare-up in the rate of inflation.
Instead, Bailey is expected to deliver another low-key press conference in which he repeats the challenges that still face the Bank that initially saw it embark on an extended rate hike cycle which began in December 2021 and continued until September last year.
Bailey is the least comfortable of the G7 Central Bank Governors when facing the press. He better suits his earlier role as head of the financial regulator, wishing to stay out of the limelight.
That was seen as acceptable when he took over from Mark Carney at a far more “peaceful” time for the world’s Central Bankers. He was expected to manage the ramifications of Brexit while managing monetary policy in a low-inflation environment.
But he was faced with the fiscal support that the Government provided during the Pandemic, which saw inflation climb to record levels. He presided over a series of “dovish hikes” in an almost apologetic manner. If he had been bolder, demanding that his colleagues support a more aggressive monetary policy stance, the UK economy could now be thriving similarly to the United States.
Bailey faces a challenge to his authority following the General Election. It is expected that whoever wins may well place a Treasury representative on the MPC to supply the Government’s perspective on monetary policy. Bailey will see this “cuckoo in the nest” as a challenge to the Bank’s independence, but he will find it difficult to resist given his weakened position.
The Bank of England is by no means alone in risking stagnation by wishing to concentrate on driving inflation down, and there has doubtless been progress made, even if Rishi Sunak wants to take credit. However, the Bank of England was the first G7 Central Bank to begin rate hikes, so why not be the first to start cuts?
Such a move would see Sterling weaken, but that would make the country’s exports more attractive, while the rise in inflation it would cause would be negligible.
Yesterday, the pound initially rallied to a high of 1.2750, but a more hawkish statement from the FOMC meeting saw it fall to a low of 1.2658 and close at 1.2673
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The FOMC wants to be confident that inflation has slowed
Gone are the days of Greenspan and Bernanke, when the Fed was capable of unorthodox monetary policy strategies which were born from a genuine desire to be proactive in managing the country’s economy.
Jerome Powell has many attributes, not least of which is bringing a lawyer’s critical eye to monetary policy decisions and a boldness to explicitly say that he disagrees with a vote taken by the FOMC. He does, however, have a “playbook” that he slavishly adheres to and is unwavering in his desire to see the job through to the finish.
His comments following the latest FOMC meeting left the market in no doubt that the Fed is going to ensure that inflation falls close to the 2% target before rate cuts begin.
Given the positives; falling inflation, strong GDP figures and a buoyant employment market, the Fed is in the envious position of being able to bide its time.
3.3% GDP growth in Q4, following a 4.9% rise in Q3, has given Powell the latitude to push back against those calling for immediate rate cuts, fearing a recession.
Although the FOMC is not allowed to get a “sneak preview” of the employment data before its publication tomorrow, the Fed’s economists were certainly able to provide a confident “guesstimate” of the data, and that encouraged the Committee to leave rates unchanged.
Powell’s message to the markets was that the FOMC can and will continue to push down hard on inflation since rates are at an appropriate level. Traders immediately “dialled back” their bets on a March cut, and the stock markets fell.
When FOMC members can make comments following the statutory blackout, they will be able to say that the Committee’s decision shouldn’t have come as a surprise, since they have been saying that it will be Summer before it is appropriate for rates to be cut.
The ADP data on private sector payrolls saw a significant fall, from a slightly revised lower figure of 158k in December to 107k in January. This was appreciably lower than the market’s prediction of 145k. Although this is a precursor of tomorrow’s NFP data, the correlation between the two numbers is historically low.
The dollar index made a healthy gain following the FOMC announcement, it rose to a high of 103.74 and closed at 103.51.
Lagarde confirms that the next move in rates will be a cut
Falling inflation in several Eurozone member states should be sufficient for the Central Bank to acknowledge that a cut in interest rates is now not only appropriate but becoming desperately needed.
It is hard to imagine that there remains a majority on the Governing Council of the ECB that is so fearful of a resurgence in inflation that they are not prepared to sanction a rate cut of twenty-five basis points.
It is a point worth labouring that the ECB appear to be operating in a vacuum with very little oversight and is being allowed to drive the entire Eurozone economy into a recession due to an outdated and outmoded fear of inflation.
Data published yesterday showed that inflation in France and Germany, the two largest economies in the Eurozone, continues to fall.
In Germany, CPI is now 2.9% down from 3.7% in December and far lower than the market’s expectation of 3.3%, while in France, it is 3.4%, down from 4.1%.
It is hard to explain Christine Lagarde’s comment that talk of rate cuts is premature, other than to consider that her remarks have political undertones.
The ECB is concerned about continued wage increases, but “betting the farm” on data which is at best unreliable, when there is solid information that inflation is falling and at a faster pace than previously expected, should be unacceptable to any regulator monitoring the delivery of monetary policy.
Philip Lane, the ECB’s Chief Economist, confirmed yesterday that he is against a recalibration of the ECB’s inflation target.
The last time this took place was just before inflation started to rise. The target was changed to an average of 2% rather than 2% as an absolute target. This gave the ECB leeway to allow inflation to rise, given that it had been below 2% for a considerable time.
The subsequent rise in inflation was considered a factor in the ECB not acting sooner to curb rising inflation. However, it had a lot more to do with individual nations “going their way” in introducing fiscal measures to support their economies that were in danger of being overrun by the Pandemic.
The Euro fell to a low of 1.0794 yesterday as the dollar reacted positively to the FOMC meeting. It closed at 1.0807 and looks set to challenge short-term support around 1.0780.
Have a great day!
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31 Jan - 01 Feb 2024
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Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.