What will the Fed’s dot plot reveal about longer-term rates?

What will the Fed’s ‘dot chart’ reveal about longer-term rate expectations?

The Federal Reserve is expected to conclude its last policy meeting of the year on Wednesday by announcing that it will raise interest rates by 0.5 percentage points, slowing its pace after four consecutive increases of 0.75 percentage points.

Fed Chairman Jay Powell said in a speech last week that the time to slow its pace of increase could come as early as December and acknowledged that the US central bank is concerned about the outlook for excessive monetary tightening. his politics. The slowdown came as US data began to show signs of slowing inflation. In October, consumer prices rose, but at their slowest pace since January.

The real story, however, will be in the Fed’s “dot plot,” a survey of officials on where they think interest rates, inflation, unemployment and gross domestic product will be in coming years. . Rate estimates in the survey should have risen significantly from September and show a Fed that is prepared to maintain tighter policy for longer.

Right now, the futures market is showing that investors expect interest rates to peak in May at around 5% before the Fed is forced to cut rates by the end of the month. year by at least 0.5 percentage point. But New York Fed President John Williams, a close colleague of Powell’s, has indicated he doesn’t expect the bank to cut interest rates until at least 2024. A dot chart showing a tighter policy until the end of 2023 could force investors to currently bet on looser monetary policy to adjust their positions. Kate Duguid

How will the new data affect the BoE’s interest rate decision?

Investors expect the Bank of England to slow the pace of rate hikes on Thursday, but economists noted that data released earlier in the week could further alter the outcome.

Markets are pricing in an 80% chance that the central bank will raise its policy rate by half a percentage point to 3.5%. The BoE fought off the fastest pace of inflation in 41 years and raised the benchmark by 0.75 percentage points in November.

Anna Titareva, European economist at UBS, expects “the majority of [Monetary Policy] Committee to vote in favor of a lesser rate increase”.

Indeed, medium-term inflation expectations “have eased in recent months”, while several members of the BoE “noted signs of easing in labor demand”, he said. she stated. “Finally, given the delays in the transmission of monetary policy, most of the impact of the hikes already achieved is yet to come, with a magnitude subject to significant uncertainty.”

Elizabeth Martins, an economist at HSBC, also thinks the BoE will raise rates by 50 basis points, but noted that influential economic releases could sway committee members.

These include November CPI inflation data, which economists polled by Reuters expect to have slowed to 10.9% from 11.1% in October; October GDP, which is expected to post a slight gain of 0.4%; and the labor market report, which is expected to show more signs of declining job vacancies and declining job numbers.

“If all three come out strong, it could tip the scales [of the MPC] to a bigger hike,” Martins said. Valentina Romei

Will the ECB slow the pace of rate hikes?

Eurozone inflation is down, the economy is on the brink of recession and interest rates are at their highest level since the 2008 financial crisis. So many economists think it’s time for the European Central Bank to move to lower rate hikes at its Thursday meeting.

This means that a third consecutive 75 basis point rate hike by the ECB seems unlikely. But the final decision could depend on how quickly the bank expects inflation to return to its 2% target in the new forecast it will release after its December 15 meeting.

Most economists expect the ECB to revise upwards its inflation projections for the next two years due to rising wages and the delayed impact of high energy costs on consumers. But most believe the central bank still expects inflation to return to its target by 2025.

Silvia Ardagna, chief economist for Europe at Barclays, said this would allow the ECB to “slow the pace of the hike to 50 basis points, given that the 200 basis points of rate hikes issued up to now will have a significant effect on future inflation”.

However, some ECB watchers, such as Carsten Brzeski, head of macro research at ING, believe a 75 basis point rate hike “is clearly still on the table”. But he added that a compromise could be found for a 50 bp rate hike if it was accompanied by “hawkish communication” and an agreement to start reducing the bond portfolio by 5 billion euros by the ECB early next year. Martin Arnold

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