Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 13th September. 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 31 July 2024, the MPC voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 5%. Four members preferred to maintain Bank Rate at 5.25%.
The US central bank - the Federal Reserve opted to maintain its target range for the federal fund rate at 5.25% to 5.50%. Federal Reserve officials left interest rates unchanged at their July meeting on Wednesday. `The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2 percent target.
All changed in the outlook for U.S. rates at the Jackson Hole meeting this month. "The time has come for policy to adjust," Fed Chair J Powell said, speaking from a conference in Jackson Hole, Wyoming, while adding that the timing and pace of cuts would depend on data. Markets are convinced a rate cut is coming in September, with one of two more penciled in before the end of year or early next.
The European Central Bank (ECB) made a big move in June, cutting interest rates for the first time since 2019. This decision, announced by ECB President Christine Lagarde, marks a pivotal moment in the ECB's monetary policy, reflecting a shift in response to evolving economic conditions in the Eurozone.
In July, The Governing Council decided to keep the three key ECB interest rates unchanged. The incoming information broadly supports the Governing Council’s previous assessment of the medium-term inflation outlook. While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June, in line with expectations.
At the September meeting, the governing council decided to lower the deposit facility rate by 25 basis points to 3.5%. Spreads on the main refinancing operations and the deposit facility rate will be feathered to 15 basis points. The interest rates on the main refinancing operations and the marginal lending facility will be decreased to 3.65% and 3.90% respectively.
In latest central bank moves, at the meeting ending on 31 July 2024, the MPC voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 5%. Four members preferred to maintain Bank Rate at 5.25%.
The US central bank - the Federal Reserve opted to maintain its target range for the federal fund rate at 5.25% to 5.50%. Federal Reserve officials left interest rates unchanged at their July meeting on Wednesday. `The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2 percent target.
All changed in the outlook for U.S. rates at the Jackson Hole meeting this month. "The time has come for policy to adjust," Fed Chair J Powell said, speaking from a conference in Jackson Hole, Wyoming, while adding that the timing and pace of cuts would depend on data. Markets are convinced a rate cut is coming in September, with one of two more penciled in before the end of year or early next.
The European Central Bank (ECB) made a big move in June, cutting interest rates for the first time since 2019. This decision, announced by ECB President Christine Lagarde, marks a pivotal moment in the ECB's monetary policy, reflecting a shift in response to evolving economic conditions in the Eurozone.
In July, The Governing Council decided to keep the three key ECB interest rates unchanged. The incoming information broadly supports the Governing Council’s previous assessment of the medium-term inflation outlook. While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June, in line with expectations.
At the September meeting, the governing council decided to lower the deposit facility rate by 25 basis points to 3.5%. Spreads on the main refinancing operations and the deposit facility rate will be feathered to 15 basis points. The interest rates on the main refinancing operations and the marginal lending facility will be decreased to 3.65% and 3.90% respectively.
Fed Funds Rate ...
In the latest move, the July meeting, the Federal Reserve held interest rates unchanged. The target range for the Fed Funds Rate was maintained at 5.25% and 5.5%.
Yields fell after Powell hinted at a September rate cut following the central bank’s July meeting. "The time has come for policy to adjust," Fed Chair J Powell said, speaking from a conference in Jackson Hole, Wyoming, while adding that the timing and pace of cuts would depend on data. Markets are convinced a rate cut is coming in September, with one of two more penciled in before the end of year or early next.
“The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate,” he said.
The Fed would weigh economic data, expectations and risks alongside inflation and labor market signals, and respond accordingly. Depending on these factors, “a reduction in our policy rate could be on the table as soon as the next meeting in September,” he said.
Inflation CPI eased down to 2.5% in August from 2.9% in July. The underlying rate (excluding food and energy costs) was 3.2% (3.3%.)
Growth in the U.S. was 3.0% in the first six 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.
We continue to model U.S. base rates peaking at 5.25% in 2024 moving to 4.75% in late 2024, with the first move (25 bps) now expected in September. The Fed funds rate projection (FOMC June) is 5.1% in 2024, 4.1% in 2025 and 3.1% in 2026.
The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 2.80%. Our model rate is around the 4.00% -4.50% level.
In the latest move, the July meeting, the Federal Reserve held interest rates unchanged. The target range for the Fed Funds Rate was maintained at 5.25% and 5.5%.
Yields fell after Powell hinted at a September rate cut following the central bank’s July meeting. "The time has come for policy to adjust," Fed Chair J Powell said, speaking from a conference in Jackson Hole, Wyoming, while adding that the timing and pace of cuts would depend on data. Markets are convinced a rate cut is coming in September, with one of two more penciled in before the end of year or early next.
“The broad sense of the committee is that the economy is moving closer to the point at which it would be appropriate to reduce our policy rate,” he said.
The Fed would weigh economic data, expectations and risks alongside inflation and labor market signals, and respond accordingly. Depending on these factors, “a reduction in our policy rate could be on the table as soon as the next meeting in September,” he said.
Inflation CPI eased down to 2.5% in August from 2.9% in July. The underlying rate (excluding food and energy costs) was 3.2% (3.3%.)
Growth in the U.S. was 3.0% in the first six 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.
We continue to model U.S. base rates peaking at 5.25% in 2024 moving to 4.75% in late 2024, with the first move (25 bps) now expected in September. The Fed funds rate projection (FOMC June) is 5.1% in 2024, 4.1% in 2025 and 3.1% in 2026.
The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 2.80%. Our model rate is around the 4.00% -4.50% level.
Bank Base Rate ...
At the latest MPC meeting in July, the committee voted by five votes to four, to reduce base rate by 25 basis points to 5.00%. Four members preferred to maintain Bank Rate at 5.25%.
Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.
Inflation, CPI moved up to 2.2% in July from 2.0% in June. CPI inflation is expected to increase to around 2.75% in the second half of this year, as declines in energy prices last year fall out of the annual comparison, revealing more clearly the prevailing persistence of domestic inflationary pressures. Private sector average weekly earnings growth has fallen to 5.0% in the three months to June, and services sector inflation has eased to 5.2% in July. GDP has picked up quite sharply so far this year
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 expect a series of two base rate cuts in the current year possibly beginning in August we said. We model base rates at 4.5% in the final quarter or possibly Q1 2025, but not much more to follow in 2025.
* 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%.
At the latest MPC meeting in July, the committee voted by five votes to four, to reduce base rate by 25 basis points to 5.00%. Four members preferred to maintain Bank Rate at 5.25%.
Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit. The Committee has judged since last autumn that monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates.
Inflation, CPI moved up to 2.2% in July from 2.0% in June. CPI inflation is expected to increase to around 2.75% in the second half of this year, as declines in energy prices last year fall out of the annual comparison, revealing more clearly the prevailing persistence of domestic inflationary pressures. Private sector average weekly earnings growth has fallen to 5.0% in the three months to June, and services sector inflation has eased to 5.2% in July. GDP has picked up quite sharply so far this year
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 expect a series of two base rate cuts in the current year possibly beginning in August we said. We model base rates at 4.5% in the final quarter or possibly Q1 2025, but not much more to follow in 2025.
* 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 ...
The European Central Bank (ECB) made a big move in June, cutting interest rates for the first time since 2019. This decision, announced by ECB President Christine Lagarde, marked a pivotal moment in the ECB's monetary policy, reflecting a shift in response to evolving economic conditions in the eurozone.
At the September meeting, the governing council decided to lower the deposit facility rate by 25 basis points to 3.5%. Spreads on the main refinancing operations and the deposit facility rate will be feathered to 15 basis points. The interest rates on the main refinancing operations and the marginal lending facility will be decreased to 3.65% and 3.90% respectively.
Markets had fully priced for the ECB to cut interest rates by another 25 basis points in September, after the institution made its first rate reduction in June, and for another 25 basis point cut before the end of the year.
Official figures showed that inflation in the Euro Area eased to 2.2 per cent in August from 2.6 per cent in July. Inflation in the European Union increased to 2.8% in July from 2.6% in June. The latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026
Growth in the European Union and the Euro area was up by 0.3% in the first quarter and a revised 0.2% in the second quarter of the year. Growth is expected to be up by 0.8% n 2024 and 1.2% in 2025.
The European Central Bank (ECB) made a big move in June, cutting interest rates for the first time since 2019. This decision, announced by ECB President Christine Lagarde, marked a pivotal moment in the ECB's monetary policy, reflecting a shift in response to evolving economic conditions in the eurozone.
At the September meeting, the governing council decided to lower the deposit facility rate by 25 basis points to 3.5%. Spreads on the main refinancing operations and the deposit facility rate will be feathered to 15 basis points. The interest rates on the main refinancing operations and the marginal lending facility will be decreased to 3.65% and 3.90% respectively.
Markets had fully priced for the ECB to cut interest rates by another 25 basis points in September, after the institution made its first rate reduction in June, and for another 25 basis point cut before the end of the year.
Official figures showed that inflation in the Euro Area eased to 2.2 per cent in August from 2.6 per cent in July. Inflation in the European Union increased to 2.8% in July from 2.6% in June. The latest ECB staff projections confirm the previous inflation outlook. Staff see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026
Growth in the European Union and the Euro area was up by 0.3% in the first quarter and a revised 0.2% in the second quarter of the year. Growth is expected to be up by 0.8% n 2024 and 1.2% in 2025.
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.
