A “dove style” VS “hawk style” rate hike of interest rate hikes, the Fed and other central banks need to choose one this week
This week will usher in the super central bank week which starts on Tuesday. From the Federal Reserve to the Bank of England to other non-mainstream central banks holding policy meetings one after the other Governors need major central banks make a key decision in the coming days: financial stability should be maintained Or is the price stable?
Federal Reserve Chairman Jerome Powell will set the tone on Wednesday, when the central bank will weigh whether the banking turmoil that has erupted in two weeks is so worrying that it should waive interest rates. More than a dozen central banks, including the UK, Switzerland and Norway, will also announce interest rate decisions this week. The Credit Suisse ( CS.US ) debacle has created new problems for policymakers, although the European Central Bank chose to pull the trigger last Thursday, raising rates by 50 basis points.
On the one hand, maintaining financial stability by keeping interest rates on hold could convince investors that regulators will do everything they can to ensure that the risk of contagion from the failure of the three US banks, now Credit Suisse, is be restricted. But the problem is that inflation well above the target remains stubborn, and Powell and his colleagues are well aware of the history of the 1970s, when inadequate austerity measures led to large increases in prices.
Diane Swonk, chief economist at KPMG, said: “Financial crises tend to be intermittent, and we are far from having fully resolved this crisis. For the Fed, given the uncertainty about the degree of credit market tightening, we’re looking for a significant pause in rate hikes.” Swonk had predicted earlier this month that the Fed would announce a 50 basis point rate hike on March 22 local time, a change that signaled a sudden change in market conditions.
As a result, central banks face “a choice between ‘dove walking’ and ‘hawk rest’,” wrote Geoffrey Yu, senior market strategist at BNY Mellon, in a note on Monday.
In other words, policymakers can raise interest rates further while assuring the public that they understand the risks to the banking system and will act appropriately to avoid a wider collapse. Alternatively, they could wait for now to buy time to watch financial developments, while promising to quickly resume the fight against inflation once the pressure on banks eases.
The futures market indicates that the Fed will announce an interest rate increase of 25 basis points local time on Wednesday. Markets are now pricing in a 75.3% chance that the Fed will raise interest rates by 25 basis points on Wednesday, and a 24.7% chance that it will choose to delay, according to the CME “FedWatch Tool.”
For the Bank of England, which started raising interest rates months before the Fed, there is less than a 50% chance of a rate hike on Thursday, and the Swiss National Bank must also make a decision on Thursday, a few days after the Swiss bank. involved in the brokerage of the Acquisition of Credit Suisse by UBS.
Second, regardless of what the major central banks do this week, the market believes they are much closer to ending the tightening cycle than expected a few days ago.
For the Fed, before the problems at Silicon Valley Bank worsened, traders were betting on a 110 basis point increase in interest rates, which would imply rates as high as nearly 6%. Currently, the market expects interest rates to only rise by another 35 basis points; the market currently expects the Fed’s interest rate peak to reach 5.25%, but overall, the market is generally betting that the Fed will end rate hikes after raising interest rates 25 basis points on Wednesday. And looking further, the market is also widely betting that the Fed will cut interest rates by 75 basis points by the end of the year.
It was a similar story in Europe, where traders cut their final ECB rate forecast by a full percentage point to 3.2%. Markets now expect the BoE to raise interest rates to as much as 4.25%, from 5% previously.
A dovishly determined attitude also helped fuel a strong rally in bond markets. German and US government 2-year bond yields, the most sensitive to monetary policy, have fallen by 100 basis points or more since March 8.
However, central banks are likely to take different decisions. In Switzerland, economists predict an increase of 50 basis points to 1.5% as the SNB catches up with its eurozone neighbor in its first decision in 2023. However, inflation in Switzerland is 3.4%, which is low compared to many developed countries.
A day before the BoE decision, official February CPI data due on Wednesday is expected to show inflation slowing to 9.9% from 10.1%; this could also be a factor in the BoE’s policy path.
ECB President Christine Lagarde insisted last week after raising interest rates by 50 basis points that price stability and financial stability were “two different types of stability addressed by different instruments”.
But raising interest rates has been blamed as one of the reasons for the current banking crisis. “Near-term economic momentum and inflation have been overshadowed by risks to the banking system, significantly repricing the Fed’s path,” Bank of America rates strategist Mark Cabana said in a note.
This article is forwarded by “Huitong Finance” authorized by Zhitong Finance
