Mann and Powell

Mann’s comments came hours before the Fed Chair Jerome Powell told the Senate Banking Committee that the market may need to upwardly revise the Fed’s rate hike expectations, given a flurry of recent inflationary data coming in higher-than-expected. Here, Powell stated that “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” Therefore, given that these comments follow the Fed conducting a less aggressive 25bpt rate hike in February, markets weighed on the prospect of the central bank’s proclivity to instead opt for a more aggressive 50bpt hike moving forward – as they did in May and December of 2022 (which came alongside 75bpt hikes in June, July, September and November). Hence, as investors digested Powell’s hawkish comments, the dollar rallied with the DXY rising some 1.25% in the subsequent few hours after his testimony. Trading this morning saw the DXY rise to 105.8 hitting three-month highs.

The upside dollar moves thus suggested that investors had not priced in the extent of the Fed’s hawkishness, as Mann had posited. Indeed, according to CME’s FedWatch tool markets are forecasting a 70% chance of a 50bpt hike, up from 30% just a few days prior to Powell’s comments. Money markets are also pricing in a terminal rate of 5.65% to be realised around September.

Mann, who joined the MPC in September 2021, is generally considered to be amongst the BoE’s most hawkish member and has often called for a front-loaded strategy where the central bank raises rates more aggressively at the start of their hiking cycles with the intention of conducting smaller ones down the line. Indeed, Mann was the only member to vote for 75bpts on 15th December 2022 (where the consensus opted instead for 50bpts). Hence, given the Bank of England’s smaller more incremental rate hikes and persistent ‘sticky’ inflation, Mann implied that the terminal rate is “beyond the forecast horizon”.