Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 19/09/23
The Federal Reserve is expected to hold interest rates at the current 5.25% - 5.50% range on Wednesday
Key Takeaways
The Federal Reserve, on Wednesday, is expected to hold the Federal Funds Rate unchanged at 5.25%-5.50%, in order to assess the effects on (future) output and inflation of the insofar monetary policy tightening (short-term rates up by +525 bps since March 2022, balance sheet reduction).
Economic projections by the Fed in June were conditioned on the FFR ending 2023 at the range of 5.5% - 5.75%, implying one more +25 bps hike from current levels. The median estimate (“dot”) in September is also expected to show one additional hike for 2023. Investors appear roughly split on whether such a path will be followed or the FFR will end 2023 at the current levels.
A slightly hawkish bias in the post-meeting statement is likely to remain, given upside risks for inflation due to the recent rise in oil prices and significantly stronger-than-previously assumed economic activity. Indeed, we expect the Federal Reserve to revise upwards its real GDP projections for Q4:2023 to at least +2.0% yoy from +1.0% yoy in June.
Fed’s projections for short-term inflation, appear broadly on track so far. In the event, based on actual and projected data based on FRBC Inflation Nowcasting model, headline PCE inflation is expected to average +3.4% yoy in Q3:2023 (core: +4.0% yoy). In June, the median assumption of the participants in the Federal Open Market Committee for end-2023 PCE inflation was +3.2% yoy (headline) & +3.9% yoy (core), respectively.
The ECB, on Thursday, stayed the course (+450 bps since July 2022), increasing policy interest rates by +25 bps (MRO: 4.5%, DFR: 4.0%). However, the ECB stated that “policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target (2%)”. As a result, for the near future, the ECB will stand pat regarding interest rates.
The new guidance was driven by stagnant economic activity, decelerating inflation and the forceful transmission of monetary tightening to financing conditions, which in the current hiking cycle is faster than previous ones. Note that credit dynamics have weakened significantly, with bank loans to households decelerating to +1.3% yoy in July, the lowest annual growth rate since November 2015. Furthermore, the annualized rate of quarterly change has been negative (-0.8%) for the first time since the euro area banking-cum-sovereign crisis.
Euro area short-term real GDP projections were revised lower, with ECB expecting growth of +0.5% qoq saar, on average, from Q3:2023 to Q1:2024 (down from +1.2% qoq saar in June’s projections). The economy is expected to return to trend-like growth in the course of 2024 due to the anticipated recovery in real disposable incomes. For 2024, the downward revision by -0.5 pps to +1.0% is mainly due to carry-over effects.
The ECB expects that (core) inflation will continue to decline gradually towards 2% in 2025, with risks remaining to the upside. Notably, market-based longer-term expectations have increased, with five-year, five-year forward (5Y/5Y) inflation-linked swap interest rates reaching +2.6% in September, the highest level since 2012. Continued increases in oil add upward (inflationary) pressures on rates.
Key Takeaways
The Federal Reserve, on Wednesday, is expected to hold the Federal Funds Rate unchanged at 5.25%-5.50%, in order to assess the effects on (future) output and inflation of the insofar monetary policy tightening (short-term rates up by +525 bps since March 2022, balance sheet reduction).
Economic projections by the Fed in June were conditioned on the FFR ending 2023 at the range of 5.5% - 5.75%, implying one more +25 bps hike from current levels. The median estimate (“dot”) in September is also expected to show one additional hike for 2023. Investors appear roughly split on whether such a path will be followed or the FFR will end 2023 at the current levels.
A slightly hawkish bias in the post-meeting statement is likely to remain, given upside risks for inflation due to the recent rise in oil prices and significantly stronger-than-previously assumed economic activity. Indeed, we expect the Federal Reserve to revise upwards its real GDP projections for Q4:2023 to at least +2.0% yoy from +1.0% yoy in June.
Fed’s projections for short-term inflation, appear broadly on track so far. In the event, based on actual and projected data based on FRBC Inflation Nowcasting model, headline PCE inflation is expected to average +3.4% yoy in Q3:2023 (core: +4.0% yoy). In June, the median assumption of the participants in the Federal Open Market Committee for end-2023 PCE inflation was +3.2% yoy (headline) & +3.9% yoy (core), respectively.
The ECB, on Thursday, stayed the course (+450 bps since July 2022), increasing policy interest rates by +25 bps (MRO: 4.5%, DFR: 4.0%). However, the ECB stated that “policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target (2%)”. As a result, for the near future, the ECB will stand pat regarding interest rates.
The new guidance was driven by stagnant economic activity, decelerating inflation and the forceful transmission of monetary tightening to financing conditions, which in the current hiking cycle is faster than previous ones. Note that credit dynamics have weakened significantly, with bank loans to households decelerating to +1.3% yoy in July, the lowest annual growth rate since November 2015. Furthermore, the annualized rate of quarterly change has been negative (-0.8%) for the first time since the euro area banking-cum-sovereign crisis.
Euro area short-term real GDP projections were revised lower, with ECB expecting growth of +0.5% qoq saar, on average, from Q3:2023 to Q1:2024 (down from +1.2% qoq saar in June’s projections). The economy is expected to return to trend-like growth in the course of 2024 due to the anticipated recovery in real disposable incomes. For 2024, the downward revision by -0.5 pps to +1.0% is mainly due to carry-over effects.
The ECB expects that (core) inflation will continue to decline gradually towards 2% in 2025, with risks remaining to the upside. Notably, market-based longer-term expectations have increased, with five-year, five-year forward (5Y/5Y) inflation-linked swap interest rates reaching +2.6% in September, the highest level since 2012. Continued increases in oil add upward (inflationary) pressures on rates.