Today finds us in the middle of something of an interest-rate party. We can start with last night and the move by what is the leader of the pack in this regard, the US Federal Reserve.
In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent.
So we got the 0.5% increase that we were expecting as it chases the US inflation rate. One perspective is that it is still around 2% below the inflation rate as whilst Tuesday’s CPI reading was 7.1% the PCE ( Personal Consumption Expenditure)number the Fed targets is usually lower than it.
Next up as we review actual moves brings us to the Swiss National Bank.
The SNB is tightening its monetary policy further and is raising the SNB policy rate by 0.5 percentage points to 1.0%.
We are establishing something of a 0.5% standard here and the lower policy rate of the Swiss reflects their superior inflation performance.
Inflation has declined somewhat in recent months, and stood at 3.0% in November. However, it is still clearly above the range the SNB equates with price stability……..The new forecast puts average annual inflation at 2.9% for 2022, 2.4% for 2023 and 1.8% for 2024.
Perhaps there was a gain from a strong Swiss Franc after all. That is really rather awkward though for a Swiss National Bank that has spent the last decade or so trying to weaken it. All those US equities and European bonds it bought. Anyway for now the Swiss have inflation quite a bit lower than their peers.
Also if you set a standard you then wait for someone to break it and Norway has just done so.
Norges Bank’s Monetary Policy and Financial Stability Committee has unanimously decided to raise the policy rate by 0.25 percentage point to 2.75 percent.
So that is where we stand and let me add that by the end of the day I expect the Bank of England and the European Central Bank to join the 0.5% increase club. I expect the Bank of England vote to be split with a couple of members voting for 0.25% for example.
Forward Guidance
The issue of what happens next will be on everyone’s mind? That is more than a little awkward when central banks have formally abandoned Forward Guidance and in some cases ( yes I am looking at you Australia apologised for it being so wrong). But the Federal Reserve statement appeared unable to stop itself.
The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
Indeed the press conference sent this message according to the Financial Times.
The Fed sent a clear signal of more such pain to come on Wednesday with a new set of economic projections that showed the benchmark rate hitting a higher level than previously projected and sitting at that threshold for an extended period.
Things got rather specific later.
Most officials now see the fed funds rate topping out at 5.1 per cent, with a large cohort of the view that it may need to exceed 5.25 per cent. Powell also warned that he could not “confidently” say the Fed would not again move up its estimates.
So there is the message which is that the Fed is guiding people towards higher interest-rates than before. About 0.5% higher. So in terms of Forward Guidance we have a case of something sung about by The Who.
Yeah
Meet the new boss
Same as the old boss
In fact we can move on in my opinion to other lyrics from that song.
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no
This is because even the new “mouth” for the Federal Reserve Nick Timiraos of the Wall Street Journal had to admit this.
The Federal Reserve has raised rates to levels this year that didn’t fit on the Summary of Economic Projections y-axis scale nine months ago. Today, the FOMC projected raising rates next year to levels that didn’t fit on the SEP y-axis six months ago.
If they were in an archery competition they would have the crowd ducking as their arrows flew well wide of the target.
Therefore it was refreshing in a way to see a sort of honesty from the Norges Bank of Norway this morning.
If the pressures in the economy persist, and signs emerge that inflation will remain high for longer than currently projected, a higher policy rate may be needed than currently envisaged. If inflation falls faster or unemployment rises more than projected, the policy rate may be lower than projected.
So we are back to the concept of the two-handed economist ( on the one hand…..but on the other hand)
Markets
The US bond market took my sort of view on the supposedly hawkish guidance.
In afternoon trading, the yield on 10-year Treasury notes US10YT=RR was down 2.9 bps at 3.473%.
The U.S. 30-year Treasury bond yields US30YT=RR was flat at 3.526%.
On the shorter end of the curve, the two-year US2YT=RR U.S. Treasury yield, which reflects step interest rate expectations, slipped 1.1 bps to 4.217% ( Nasdaq.com)
Both the longer-term yields are around 3.5% which means they are looking ahead of the promised rises and expecting cuts after that. Switching to the two-year we see that it has matched the interest-rate rises so far but is not dipping its toe into beginning to price in further ones. At best for the Fed we are getting so Blood, Sweat & Tears.
What goes up must come downSpinnin’ wheel got to go ’round
It could take a little more solace from the US Dollar which rallied and moved the Japanese Yen a couple of big figures from 134.75 to 136.75. But the big picture here has been the move lower from above 150 so it has not broken the overall trend.
Comment
There are various perspectives on this. We can start with the view that our worries that we could not take interest-rates above 3% were a little overdone. Although we have bit had them for long and something may yet break! Indeed we do see issues such as the previous plunge in the crypto world. I see the rally in Bitcoin to US $18,000 as being part of a hope the rises will soon be over move and thus confirming that. Plus I was right to warn for all those years about the risks of higher interest-rates for central banks themselves.
Unrealized losses on Fed‘s balance sheet now exceed $1.125 TRILLION. ( @TheCarfangGroup)
They do not account for it in that way as they do not mark to market. However as they sell bonds via QT they will be creating losses which they put on the balance sheet as deferred assets. That is a euphemism and a half. As the creators of money they can create more but that is awkward. Because the policy now is responding to the money supply creation in the pandemic so doing more of that will create more inflation.
Also the US Treasury had got used to a stream of remittances oiling its fiscal wheels and that is now over. So you count the profits but put the losses as “deferred assets”? The US Treasury is also under pressure from the higher bond yields and inflation so ironically it will welcome bond markets expecting a pivot on interest-rates.