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Fed ‘Skip’ But Hawkish Dot Plot Sees Markets Upwardly Revise Rate Expectations

Yesterday evening, the Federal reserve met market expectations by holding their benchmark rate. This represented the first time that the FOMC opted to keep rates unchanged in the last ten meetings spanning fifteen months, as they signalled a ‘skip’ to their monetary tightening cycle.

This represented the first time that the FOMC opted to keep rates unchanged in the last
ten meetings spanning fifteen months, as they signalled a ‘skip’ to their monetary tightening cycle.

Rhetoric from policy makers since the FOMC’s meeting in May has focused on the subtle difference between a ‘pause’ and a ‘skip’ (where the latter denotes an intentional decision to leave out a hike before continuing to tighten later on). As such, during Powell’s press conference, the Fed’s Governor was keen to reiterate that there may be more rate hikes this year and looked to provide a defence to the ‘skip’ stating that “it seemed to us to make obvious sense to moderate our rate hikes as we got closer to our destination”. Health Insurance

The release of the dot plot also suggested that most policy makers are projecting two more

hikes of this year. This, along with Powell’s hawkish comments, has seen markets upwardly revise their rate hike expectations for the Fed, given that many investors were previously weighing on just one additional 25bps hike this year.

Powell was also keen to defend the Fed’s actions by arguing that the skip would allow policy makers more time to assess the impact of their tightening cycle. This being particularly important, he argued, given the time lag between hiking rates and seeing the effects on the wider economy. As such, FOMC members’ monetary decisions will continue to be highly contingent on data around inflation, the labour market, growth and banks’ balance sheet’s resilience to the Fed’s tightening.

All Eyes on Frankfurt Ahead of Rate Decision

At 12:15 this afternoon, the ECB will make their latest rate decision, where the general market consensus is expecting Frankfurt to raise rates by a further 25bps. This would mark the eighth consecutive rate hike from the central bank and bring borrowing costs to their highest level since 2008 as inflation continues to remain well above their 2% target. While inflation is slowing in all but two of the currency union’s member states, core inflation remains at 5.3% on an annualised basis across the eurozone, while headline (which includes food and energy indexes) is at 6.1%.

The ECB have already raised rates by 375bps over the last twelve months, and it is expected that policy markers will also opt for a further 25bps hike in July. Nevertheless, the ECB continues to weigh on the implications of overtightening especially given how Germany (the largest economy in the Eurozone) is in a technical recession.

The ECB are also expected to provide further guidance on their quantitative tightening programme. As of March, the size of the ECB’s balance sheet was some €1tn down from its peak with the central bank passively and actively reducing their portfolio.

Privileges Committee to Publish Report on Johnson’s Conduct

Today will see the Parliamentary Privileges Committee publish their report on former PM Boris Johnson’s conduct to the House of Commons around party-gate. According to the FT citing sources close to the inquiry, Johnson “will have been found to have committed ‘multiple’ contempts of parliament” including “being found to have misled MPs”. With


Johnson already resigning last Sunday, and tensions high between the former and current PM all eyes are on the findings of the report and subsequent statements from Downing Street’s former and current resident.

New Zealand Enters Recession

Data this morning reveals that New Zealand has entered a technical recession as the country sees a slowdown of economic activity with borrowing rates at 14-year highs. Stats NZ reported that the economy contracted 0.1% over Q1 2023 following a 0.7% contraction in Q4 2022. The first three months of the year has seen a sharp slowdown in the business services sector which contracted 3.5%, though household consumption rose 2.4% as residents spent more on travel.

Economists assessing the data highlighted the impact of cyclones Hale and Gabrielle, which caused major problems to much of the country’s fruit and vegetable growing regions. The RBNZ earlier indicated that they did not project further rate hikes, and while inflation remains above target, today’s data gives greater credence to the view that the central bank will be less inclined to further tighten.

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