Following on from our recent Central Bank Update: December 2023, the governing bodies of three of the world’s major central banks met last week to make some crucial decisions on monetary policy that will give an indication of the agenda for the upcoming year. Let’s take a closer look at the key points post last week’s meetings…
During the press conference after the Federal Open Market Committee (FOMC) meeting on Wednesday December 13, Chairman Jerome Powell provided a more dovish outlook than the already eager markets had expected. The FOMC adjusted their forecast for the Fed Funds rate at the close of 2024, reducing it by 50 basis points, and indicating the likelihood of two 25 basis point cuts in the Fed Funds rate in the coming year. Furthermore, they maintained their forecast for the unemployment rate while slightly reducing their inflation forecasts for 2024 and 2025.
Could this be indicative of a “soft landing”?
Notably, none of the FOMC members forecast any rate hikes.
Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, December 2023
During his address, Chairman Powell emphasised that the risk of excessive tightening was now balanced with the risk of not tightening enough. This sentiment resonated positively in financial markets, leading to significant rallies in both stocks and bonds. The dollar weakened, notably versus the Japanese Yen and the British Pound, while gold and oil also had sharp rallies. Chairman Powell refrained from commenting on recent financial market movements, indicating that the Federal Reserve was unperturbed by the easing of financial conditions resulting from the rallies in equity and bond markets.
On the flip side, the Bank of England (BoE) and the European Central Bank (ECB) maintained their robust rhetoric in combating inflation, asserting that it was too premature to declare victory over inflation. In fact, three members of the BoE Monetary Policy Committee voted for a rate hike during their meeting. Given that UK inflation remains significantly well above target, the BoE’s hawkish stance was not a surprise.
It’s important to note that in the upcoming week, a significant economic indicator to watch out for is the Gross Domestic Product (GDP) report scheduled for Friday. The initial estimates of UK GDP in the three months through September showed zero growth. However, since then retail sales have since come in weaker than expected. The significance of this lies in the potential downward revision of the previous GDP figure, which could potentially thrust the UK into a mild recession – defined as two consecutive quarters of negative growth. Such a scenario would intensify pressure on the BoE to consider rate cuts.
The financial markets are likely to embrace the emerging narrative of a Federal Reserve that has pivoted towards an easing bias, unless contradicted by economic data. The recent market movements have surpassed the Federal Reserve’s updated rate forecasts by a considerable margin – at the time of writing, markets are pricing in as many as seven rate cuts next year, with the first one expected in March. This leaves little room for error; even minor fluctuations in economic indicators could trigger a substantial reversal in some of the recent market trends.
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