Rate announcements from the Fed and ECB for this week: – It’s all said and done


Global Courant

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After almost two weeks in a so-called “quiet period”, two of the world’s major central banks are back in action next week:

The US Federal Reserve has an interest rate meeting on Wednesday evening, while the European Central Bank has the same exercise in the afternoon the next day.

After aggressively raising interest rates over the past year, both central banks are in what the market and economists alike believe is their last hurrah.

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Macroeconomist Knut Magnussen of DNB Markets says annual core inflation growth is still well above target. (Photo: Mikaela Berg)

– Done talking

The market players are counting on a high chance of a simple interest rate hike from both central banks next week, and are especially confident in their case when it comes to the Fed.

– The conversation is over in that sense and in our view this will also be the last rate hike from the Fed. We don’t think it will be necessary to add another one, says macro economist Knut Magnussen in DNB Markets.

Sara Midtgaard, senior economist at Handelsbanken Capital Markeds, agrees.

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– The market sees only a 30 percent chance of a new increase in the autumn. If Powell notes that another hike will be needed, it could trigger market reactions, says Midtgaard.

On the previous occasion, in mid-June, the Fed’s interest rate committee shared an overview of what members think about interest rate levels going forward. There it became clear that the members estimate an average of two more simple interest rate increases, namely a total of 0.5 percentage point.

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As is well known, the central bank did not raise interest rates in June, but Fed chief Jerome Powell has made it clear that they will monitor macroeconomic developments.

– Since then, the information that has come in has been shared somewhat. The labor market is still quite strong, although employment growth has slowed somewhat, says Magnussen.

In addition, inflation data for June in the US was released a few weeks ago and was surprisingly lower than estimates. On the other hand, Magnussen believes inflation is still high enough to warrant a rate hike next week.

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– The annual growth rate of core inflation is still well above target. The inflation picture has recently been helped somewhat by base effects, which explains part of the decline.

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Base effects can simply be explained as the effect that periods of strong price growth, for example, gradually disappear from the inflation figures, because inflation is calculated over a certain period – for example, from month to month or on an annual basis.

The market parties are now calculating a certain chance that interest rates will be raised again this autumn, but the chance is less than 50 percent.

When it comes to interest rate reduction market parties believe that this will only happen in a little less than a year.

– Is it realistic that interest rates will be 5.5-6 percent for a year after such a sharp rise in a short period of time?

– We think so, and the reason for that is that this cycle is very special: inflation soared, while central banks were in arrears all along. That’s why I think they’ll be very careful about austerity before they’re fully confident that inflation will stay around the two percent target, says Magnussen.

New inflation numbers

Midtgaard thinks Powell will most likely recognize that some of the inflationary pressures have eased. The fact that core inflation is still at a high level still means he will say they need to look at the situation, she believes.

– When it comes to the PCE deflator numbers coming in on Friday, they will likely show much of the same as the CPI numbers we already have.

Often referred to as the Fed’s preferred measure of inflation, PCE numbers differ from traditional CPI numbers in several ways. Unlike the consumer price index (CPI), the weighting of goods and services in the PCE is adjusted to account for changes in people’s spending habits. The PCE deflator is the quantity that the US central bank uses as the basis for its calculations of inflation.

Midtgaard believes that the European Central Bank, for its part, is not quite done raising interest rates.

– The chance of an increase in September is 80 percent as it is priced into the market. The eurozone is also battling high inflation, so there will likely be another rise before they can say they’re done, says Midtgaard.

“Goldilocks and Soft Landing”

Since market interest rates started to rise in early 2022, the yield curve inverted and central banks gradually started to raise their key rates, there has been much talk of a recession. Both for the American and for the European economy.

In the US, the Fed came out and said its goal was to slow the economy to get a “soft landing” when interest rates started to rise. But with high inflation and a central bank in arrears, many market participants and pundits left little chance for the Fed to actually achieve this.

However, the recession has slowed down. The stock market in both the US and Europe has also risen sharply over the past year and the analysis departments of several banks have reduced the risk of an actual recession.

– Will the US economy be able to make a soft landing?

– That’s the big question. We have long believed that a cooling is needed, meaning that unemployment rises to bring inflation down permanently. We believe that this is still necessary.

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Magnussen points, among other things, to wage growth in the US, which he believes is incompatible with the inflation target of two percent.

– History is very clear that if you want wage growth, you have to get a weaker labor market.

So far, however, the number of unfilled vacancies has decreased, without simultaneously increasing unemployment. And Magnussen again notes that inflation has come down significantly. The combination makes the phrase “goldilocks moment” back in the headlines, namely “the best of both worlds”.

– The numbers that have come in recently have built up the image that it is can be a soft landing. It may have been important for the rise in the stock market, but this earnings season and the technology sector also play a major role, says Magnussen.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases through links that lead directly to our pages. Copying or other use of any part of the content may only take place with written permission or as permitted by law. For further conditions see here.

Rate announcements from the Fed and ECB for this week: – It’s all said and done

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