The interest-rate story in 2024 appeared to be clear cut as we entered the year fired up by hints from the Federal Reserve Chair Jerome Powell. At that point bond markets surged and would have expected one and maybe two cuts by now. Whereas we were told this over the weekend on Face the Nation.
Bank of America’s prediction that the Fed will cut interest rates this year, but not until December, is a “reasonable prediction,@MinneapolisFed Pres. @neelkashkari says: “If you just said there’s going to be one cut…that would likely be toward the end of the year.”
Personally I would stay away from backing the predictions of financial market players if I was in that role. But the central point is that we are now being directed to the end of the year. As that will be in the US election campaign that begs a few questions. After all the ECB did just cut interest-rates in the midst of European Union elections. I do not expect that the Bank of England will today by Mr. Kashkari has opened up a can of worms that leaves his prediction under the Definitely Maybe category. Or to put it another way the US ten-year yield is around half a point higher than it was as the year opened.
Norway
This morning the Norges Bank has stuck to a rather similar line.
Norges Bank’s Monetary Policy and Financial Stability Committee decided to keep the policy rate unchanged at 4.5 percent at its meeting on 19 June.
They blow their own trumpet.
The policy rate has been raised significantly in recent years and has contributed to cooling down the Norwegian economy. Growth in the economy has slowed, and price inflation has declined.
But then seem not quite so sure.
The Committee was concerned with the possibility that if the policy rate is lowered prematurely, inflation could remain above target for too long.
There is an issue of the confidence of central bankers being shattered or perhaps I should say their arrogance after the Transitory debacle. But now they are in a spin. Things have got better.
Since the March Report, inflation has been a little lower than projected, while unemployment has increased as expected.
I know that the unemployment rise will be brutal but in terms of policy it seems to be working. However they are now fretting about what might happen?
This could mean that inflation will be higher ahead than projected in the March Report.
This means that they are potentially on course to copy all the mistakes of the 1970s where rising inflation was ignored leading to a panicked slamming of the interest-rate brake and then holding it for too long. Or to put it another way they are focusing on what are lagging indicators.
On the other hand, Regional Network enterprises report improved prospects, and it appears that wage growth will be higher than envisaged earlier.
So they end up rather copying Neel Kashkari.
“If the economy evolves as currently envisaged, the policy rate will continue to lie at 4.5 percent to the end of the year, before gradually being reduced,” says Governor Ida Wolden Bache.
I have to confess I am left wondering if a 2023 theme is still in play here as whilst there is only a brief mention.
or the krone depreciates,
The weakness in the Norwegian Krone when it fell from 8.2 to 11 versus the US Dollar may have left them rather scarred. Whilst it is calmer at 10.5 now that is probably buttressed by the interest-rate expectations. Especially as the issue is still in play.
The Indian rupee declines to an all-time low as broad dollar strength weighs on most emerging Asian currencies. ( @business)
Switzerland
The Swiss have taken a different course. Maybe the football last night was all too much.
The Swiss National Bank is lowering the SNB policy rate by 0.25 percentage points to 1.25%.
The explanation starts logically.
The underlying inflationary pressure has decreased again compared to the previous quarter.
But then hits rather more troubled water.
Inflation has risen slightly since the last monetary policy assessment, and stood at 1.4% in May.
Rents seem to be a problem everywhere and I will have to check if the Swiss follow the international statistical consensus on rents because if so the number will be more relevant to what happened last year?
Higher inflation in rents, tourism services and oil products has contributed in particular to this increase. Overall, inflation in Switzerland is currently being driven above all by higher prices for domestic services.
The latter sentence is intriguing because such developments were used by other central banks to justify interest-rate rises. As they are animals who love to be in a pack they will be worried by this. It takes away the excuse that everyone else was doing the same. Indeed they depart further from the pack below.
Over the longer term, it is slightly below the previous forecast. This reflects somewhat lower second-round effects.
As so often we are getting rather mixed messages here. Actually I approve of a central bank looking ahead and then it is logically consistent to cut after a lower inflation forecast. After all their inflation experience has been on a lower path than elsewhere.
The forecast puts average annual inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026.
Although I do nor share their enthusiasm for the impact of one single rate cut!
Without today’s rate cut, the forecast would have been lower.
Still they have been kind enough to back my theme that central banks steer the economy via the housing market. Especially ones which have recently seen a large banking collapse.
Momentum on the mortgage and real estate markets in recent quarters has been weaker than in previous years. However, the vulnerabilities in these markets remain.
But there is an elephant in this particular room which they have ignored apart from one brief mention.
The SNB is also willing to be active in the foreign exchange market as necessary.
The Financial Times puts it like this.
SNB chair Thomas Jordan said after the move that the bank was “willing to be active in the foreign exchange market as necessary”. The franc has appreciated in recent weeks as investors sought a haven amid uncertainty caused by France calling a snap election, which sparked a sell-off in European bonds.
As well as an elephant in the room we have an echo from the past as we recall the promises of “unlimited intervention” which particularly related to the exchange rate versus the Euro. In which case we have a curious link via President Macon of France calling an election and a Swiss interest-rate cut.
Also some are fearing we may be heading back to negative interest-rates.
We think more cuts are coming,” said Melanie Debono at Pantheon Macroeconomics. “We think the SNB will broadly match the total value of ECB cuts over the easing cycle, in a bid to keep the franc relatively stable against the euro and prevent significant disinflation.”
Notice how disinflation is presented as a type of bogeyman.
Comment
Whilst we get a lot of rhetoric from central banks about inflation. But I have to confess that for me today’s moves have it as a second-order function behind the exchange-rate. Plus the Swiss are able to give the mortgage market a boost. Whilst I am considering the Swiss let me also point out that on a marked to market basis their overseas equity portfolio is looking rather good.
S&P 500 futures climbed on Thursday morning as investors look for the benchmark to add to its latest record high…..Stocks are headed for a winning week after the S&P 500 reached a fresh record on Tuesday, alongside the Nasdaq Composite. The stock market was closed Wednesday for the Juneteenth holiday. ( CNBC )
Notayesmanseconomics's Blog 
Bank of England pause with what is described as a “dovish hold”, rate cut now expected in August.Vote was 7-2 with Swati Dhingra and call me Dave Ramsden voting for a cut.
Hi Kevin
It felt like this was a meeting that was on hold because of the election and so it turned out with the vote staying the same. Faisal Islam of the BBC thought he was being clever tweeting this.
“BUT, decision “finely balanced” for 3 holds, probably including Governor, which mean it was a close run thing not to cut – Those 3 members playing down sticky services inflation
August cut very much on”
However there was no mention of a 3 I could see in the Minutes and whilst the PR of the present Governor has been poor I am not sure even he would be that dim.
According to todays press views interest rates won’t be cut for some time yet however lets face it if the market doesn’t like the result of the election anything can happen. More flesh on the bones from the minutes:
“47: Seven members judged that maintaining Bank Rate at 5.25% was warranted at this meeting. Headline CPI inflation had fallen back to the 2% target. The restrictive stance of monetary policy was weighing on activity in the real economy, was leading to a looser labour market and was bearing down on inflationary pressures. Key indicators of inflation persistence had continued to moderate, although they remained elevated.
48: There continued to be a range of views among these members about the extent of accumulated evidence that was likely to be needed to warrant a change in Bank Rate, and the degree to which incremental information was leading them to update materially their assessment of inflation persistence.
49: For some members within this group, the return of headline inflation to 2%, while welcome, was not necessarily indicative of the required sustained return to target. Continued high levels of, and upside news to, services inflation supported the view that second-round effects would maintain persistent upward pressure on underlying inflation. Wage growth had continued to exceed model-based estimates. Indicators of domestic demand were stronger than had been expected, and the risks to the outlook for activity were skewed to the upside. For these members, more evidence of diminishing inflation persistence was needed before reducing the degree of monetary policy restrictiveness.
50: For other members within this group, the upside news in services price inflation relative to the May Report did not alter significantly the disinflationary trajectory that the economy was on. This view was supported by evidence that the recent strength in services inflation included regulated and indexed components of the basket, and volatile components. The impact of the increase in the NLW this April on aggregate pay growth was unlikely to be as large in future. Such factors would not push up medium-term inflation. For these members, the policy decision at this meeting was finely balanced.
51: Two members preferred a 0.25 percentage point reduction in Bank Rate at this meeting. For these members, Bank Rate needed to become less restrictive now to enable a smooth and gradual transition in the policy stance, and to account for lags in transmission. CPI inflation had been on a firm downward trajectory for some time and had returned to the 2% target in May. It was forecast to stay close to 2% in the short term, consistent with the further easing in the labour market, forward-looking indicators of inflation and pass-through, and continued falls in inflation expectations. Given the subdued outlook for demand, the risks to inflation remaining sustainably at the target in the medium term were to the downside.
52: The MPC remained prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It would therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation. As part of the August forecast round, members of the Committee would consider all of the information available and how this affected the assessment that the risks from inflation persistence were receding. On that basis, the Committee would keep under review for how long Bank Rate should be maintained at its current level.
53: The Chair invited the Committee to vote on the proposition that:
54: Seven members (Andrew Bailey, Sarah Breeden, Ben Broadbent, Megan Greene, Jonathan Haskel, Catherine L Mann and Huw Pill) voted in favour of the proposition. Two members (Swati Dhingra and Dave Ramsden) voted against the proposition, preferring to reduce Bank Rate by 0.25 percentage points, to 5%.”
I’m finding it impossible to separate economics policy from politics, even more than usual at the moment.
Usually seeing political motives in economic policy is, or at least seems, straightforward; not at present. We were told to expect FIVE interest rate cuts this year, yet halfway through have seen none!
Elections.
USA
The Fed seems to indicate that there will not be a cut in US interest rates until much later in the year, possibly until after the presidential election. Remembering the close relationship between Yellen & the Fed, one would have assumed the Fed would move heaven & hell to give Biden a favourable wind, bringing forward interest rate cuts as much as they dare.
Why, since indicators seem so favourable is the Fed’s policy as it is?
Why no help for Brandon?
UK
“A week is a long time in politics.” said Harold Wilson, yet Sunak, well behind in the polls, calls an election FOUR MONTHS before he must, with the Dep PM begging the electorate not to give Labour a super-majority. So many Tory politicians fear the up-coming electoral slaughter that scores are “standing down” at the GE whilst some have changed parties. (That some feel they can comfortably go directly from the governing party, to the opposition, says a lot about the value of our democracy.)
This is not normal behaviour for politicians, who cling to as much power as they can, for as long as they can.
Once again, no help from the BoE; it’s always, “Next time!” even though inflation, (if you believe the figures, is now back on its 2% target!
Either of these scenarios would normally be unimaginable, but to have both concurrently? Sends a shiver down my spine.
The Fed surely wants to help Sleepy Joe, but daren’t.
Rishi Sunak doesn’t want to be PM, especially between July & November.
It may all be circumstantial, but I believe, from this abberant behaviour that they know something we don’t, something big, something bad.
Please fault my logic! Please reassure me! I don’t want to be right!
Hi therrawbuzzin
Maybe Secretary Yellen annoyed the Federal Reserve by so obviously organising things for interest-rate cuts ( issuing so much short-dated debt).
As for Sunak I have to confess calling an early election seemed mad to me for the reason of what is happening in the polls which is a collapse. You would have thought he would have wanted to wait for better inflation numbers and more GDP ones ( the Bank of England raised its forecast to 0.5% for this quarter today). But having watched Yes Prime Minster many times these people live in a fantasy world.
You missed out Macron who also seemed to panic…..
I believe (for every drop of rain that falls, a flower grows), they don’t believe inflation is back to its 2% target. If they did Bank Rate wouldn’t be where it is even if they believed there are upward pressures; pressures which must be huge to justify the current rate.
No, I don’t believe it – something else is going on. As you say, something big or bad or both.
Alan regarding Sunak, you might be right about Sunak, but don’t rule out total incompetence, I think he has form!
The Fed? I’ve given up trying to work out what is going on there, I cannot understand how the treasury can get treasury sales away at current yields(and falling) given the inflation already in the system and likely to flare up when Powell cuts rates, yes there might be a recession, (but I think inflation is so badly measured that it is much higher than the bond market realises)that would explain the bond market discounting deflation but we all know the Fed is going to eventually jump in and print – it just depends how long they let the suffering go on before they do next time, considering Trump is likely to win I think they will make the pain and damage extreme as Trump will be blamed by the msm thus giving the Fed cover.
Also Biden is borrowing and spending that much($1trn every three months) that they don’t need to cut rates!
Here is Rory Stewart giving his twopence on the Tories and current political climate.
He’s a nutter.
If Sunak wanted to, he could resign his personal position without calling an election.
This is different & he’s getting out of parliament as fast as possible.
Hello Shaun,
Don’t the Swiss do well if the market is uncertain , like the Yen ?
Scary times ahead me thinks
Perhaps when the Swiss join BRICs , ahahah
Forbin
Hi Forbin
Yes the Swiss Franc is a safe haven although the banking bit of that is rather tarnished after what happened to Swiss Bank. But it has kept a strong currency whereas Japan rather threw its one overboard,. 158.80 versus the US Dollar now and 201 versus the UK £.
I know he’s a bit whacko, but:
Galloway’s prediction of war within 6 months ‘very plausible’ | ‘We are making a GRAVE mistake’ (youtube.com)
Remember where you heard it first.