Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 3rd January. Every week we update our scenario forecasts for base rates in the U.S., UK and Europe over a three year period. We also include our expectations for inflation, as an input to the central bank reaction function, in the Saturday Economist updates.
In latest central bank moves, at the meeting ending on 19th December 2024, the MPC voted by a majority of 6 to 3 to hold Base Rate at 4.75%. Three members (Swati Dhingra, Dave Ramsden and Alan Taylor) voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 4.5%.
In the U.S, on the 18th December, the FOMC announced a 25 basis point cut to 4.25%. "In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4.25 to 4.5 percent.
In Europe, this week, the European Central Bank cut interest rates for fourth time this year. The key rate was lowered to 3.00 per cent from 3.25 per cent after fears the eurozone’s main economies are struggling.
In latest central bank moves, at the meeting ending on 19th December 2024, the MPC voted by a majority of 6 to 3 to hold Base Rate at 4.75%. Three members (Swati Dhingra, Dave Ramsden and Alan Taylor) voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 4.5%.
In the U.S, on the 18th December, the FOMC announced a 25 basis point cut to 4.25%. "In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4.25 to 4.5 percent.
In Europe, this week, the European Central Bank cut interest rates for fourth time this year. The key rate was lowered to 3.00 per cent from 3.25 per cent after fears the eurozone’s main economies are struggling.
Fed Funds Rate ...
In the latest move, in the December meeting, the Federal Reserve voted for a 25 basis point cut to 4.25%. "In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4.25 to 4.50 percent.
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
Inflation CPI eased up to 2.7% in November from 2.6% in October. The underlying rate (excluding food and energy costs) was unchanged at 3.3%.
Growth in the U.S. was 2.9% in the first nine months of the year, compared to growth of 2.5% in 2023. The US economy is in better shape than economists and the Fed had expected. The Fed has upgraded the forecast of growth in the year to 2.5% in 2024 and 2.1% in 2025.
The Summary of Economic Projections, suggested the Fed Funds rate will average around 3.9% end of 2025 and 3.4% Q4 2026. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 3.00%.
Our model rate is around the 4.00% -4.50% level. U.S. ten year rates closed at 4.50% this week. Markets expect a more gradual approach from the Fed as they await developments in the new administration.
"Today was a closer call, but we decided it was the right call," Fed chair Jerome Powell told reporters at a press conference on Wednesday, referring to the decision to cut rates. "We are at or near a point at which it will be appropriate to slow the pace of further adjustments," Powell added. In September, the median top Fed official projected it would be appropriate to cut rates to 3.4% by the end of 2025. Now, that median projection is 3.9%. Markets assume that implies only two rate cuts ahead next year, not the four signaled by previous projections.
In the latest move, in the December meeting, the Federal Reserve voted for a 25 basis point cut to 4.25%. "In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4.25 to 4.50 percent.
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
Inflation CPI eased up to 2.7% in November from 2.6% in October. The underlying rate (excluding food and energy costs) was unchanged at 3.3%.
Growth in the U.S. was 2.9% in the first nine months of the year, compared to growth of 2.5% in 2023. The US economy is in better shape than economists and the Fed had expected. The Fed has upgraded the forecast of growth in the year to 2.5% in 2024 and 2.1% in 2025.
The Summary of Economic Projections, suggested the Fed Funds rate will average around 3.9% end of 2025 and 3.4% Q4 2026. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 3.00%.
Our model rate is around the 4.00% -4.50% level. U.S. ten year rates closed at 4.50% this week. Markets expect a more gradual approach from the Fed as they await developments in the new administration.
"Today was a closer call, but we decided it was the right call," Fed chair Jerome Powell told reporters at a press conference on Wednesday, referring to the decision to cut rates. "We are at or near a point at which it will be appropriate to slow the pace of further adjustments," Powell added. In September, the median top Fed official projected it would be appropriate to cut rates to 3.4% by the end of 2025. Now, that median projection is 3.9%. Markets assume that implies only two rate cuts ahead next year, not the four signaled by previous projections.
Bank Base Rate ...
In latest central bank moves, at the meeting ending on 19th December 2024, the MPC voted by a majority of 6 to 3 to hold Base Rate at 4.75%. Three members (Swati Dhingra, Dave Ramsden and Alan Taylor) voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 4.5%.
Inflation CPI basis increased to 2.6% in November from 2.3% in October . CPI(g) goods inflation moved to 0.4% from -0.3% prior month. CPI(s) Service Sector inflation held at 5.0%. Core inflation increased to 3.5% from 3.3%. The Bank now expects inflation to rise to 2.7% by the end of the year and up to 2.8% in 2026 before returning to the 2.0 per cent target in 2027.
So what can we make of it all? The Bank remains concerned about the high level of wage settlements and service sector inflation. For the moment, our overall forward guidance outlook remains unchanged. We model base rates at 4.5% in Q1 2025 but not much more to follow in 2025.
This week, Andrew Bailey said "Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further."
Ten year gilt rates closed at 4.5% this week. The Bank's favored OIS swap rates suggest 4.0% could be the floor to cuts over the forecast three year period. 4.0% to 4.5% the scenario spread for base rates. More news on service sector inflation awaited. NI hikes won't help.
* Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
In latest central bank moves, at the meeting ending on 19th December 2024, the MPC voted by a majority of 6 to 3 to hold Base Rate at 4.75%. Three members (Swati Dhingra, Dave Ramsden and Alan Taylor) voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 4.5%.
Inflation CPI basis increased to 2.6% in November from 2.3% in October . CPI(g) goods inflation moved to 0.4% from -0.3% prior month. CPI(s) Service Sector inflation held at 5.0%. Core inflation increased to 3.5% from 3.3%. The Bank now expects inflation to rise to 2.7% by the end of the year and up to 2.8% in 2026 before returning to the 2.0 per cent target in 2027.
So what can we make of it all? The Bank remains concerned about the high level of wage settlements and service sector inflation. For the moment, our overall forward guidance outlook remains unchanged. We model base rates at 4.5% in Q1 2025 but not much more to follow in 2025.
This week, Andrew Bailey said "Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further."
Ten year gilt rates closed at 4.5% this week. The Bank's favored OIS swap rates suggest 4.0% could be the floor to cuts over the forecast three year period. 4.0% to 4.5% the scenario spread for base rates. More news on service sector inflation awaited. NI hikes won't help.
* Long Term Note : In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
Euro Base Rate ...
In Europe, in December the European Central Bank cut interest rates for fourth time this year. The key rate was lowered to 3.00 per cent from 3.25 per cent after fears the eurozone’s main economies are struggling.
The Governing Council decided to lower the three key ECB interest rates by 25 basis points. Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will fall to 3.00%, 3.15% and 3.40% respectively, with effect from 18 December 2024.
Official figures showed that inflation in the Euro Area increased to 2.4 per cent in December from 2.2 per cent in November. Inflation in the European Union moved to 2.35% in November from 2.3% in Octobe. The latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027.
Growth in the European Union was up by 0.7% in the first half of the year and up by 1.0% in the third quarter. In the Euro area, growth was up by 0.4% in the first quarter, 0.5% in the second quarter and up by 0.9% in the third quarter. Euro area growth is expected to be up by 0.7% in 2024 and 1.0% in 2025. [All data year on year basis]. ECB Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027.
In Europe, in December the European Central Bank cut interest rates for fourth time this year. The key rate was lowered to 3.00 per cent from 3.25 per cent after fears the eurozone’s main economies are struggling.
The Governing Council decided to lower the three key ECB interest rates by 25 basis points. Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will fall to 3.00%, 3.15% and 3.40% respectively, with effect from 18 December 2024.
Official figures showed that inflation in the Euro Area increased to 2.4 per cent in December from 2.2 per cent in November. Inflation in the European Union moved to 2.35% in November from 2.3% in Octobe. The latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027.
Growth in the European Union was up by 0.7% in the first half of the year and up by 1.0% in the third quarter. In the Euro area, growth was up by 0.4% in the first quarter, 0.5% in the second quarter and up by 0.9% in the third quarter. Euro area growth is expected to be up by 0.7% in 2024 and 1.0% in 2025. [All data year on year basis]. ECB Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027.
Scenario Comparisons ...
This is the table of scenario comparisons. We would expect UK rates to lag not lead the US pattern. EU rates would follow the US/UK lead. Inflation may subside sooner than expected. Central banks may worry about the shock to growth. This is a scenario not the plan.
We model the long run UK rate at 4.0% - 4.5%. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%.
This is the table of scenario comparisons. We would expect UK rates to lag not lead the US pattern. EU rates would follow the US/UK lead. Inflation may subside sooner than expected. Central banks may worry about the shock to growth. This is a scenario not the plan.
We model the long run UK rate at 4.0% - 4.5%. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%.
That's all for this week ... "to understand the markets you have to understand the economics" and we do ...
© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
