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 