Brian Jacobsen provides perspective on this week’s key topics, including the Fed’s 75-basis-point hike in the federal funds rate—plus, his thoughts on what the week ahead may hold. Here’s his report for the week of June 11–17, 2022.
The week that was
- The Federal Open Market Committee (FOMC) hiked its target for the federal funds rate by 75 basis points (bps; 100 bps equal 1.00%). In the FOMC’s Summary of Economic Projections, the median forecast has the federal funds rate at 3.4% by the end of 2022. With four more FOMC meetings scheduled this year, getting to that rate works out to 50-bp hikes at each remaining meeting.
- There was an important change in the language of the FOMC members’ statement. Instead of saying they “expect” inflation to come down, they said they’re “committed” to making it happen. What this means: Even if making a series of rate hikes risks a recession or a further slowdown, they won’t stop hiking until it hurts.
- Kansas City Fed President Esther George, typically one of the more hawkish members of the Fed, dissented, preferring a 50-bp hike instead.
- Compared with the projections the FOMC made in March, it expects a slowdown in the economy. The March projection was for 2.8% growth for 2022, but now it’s 1.7%. The committee ramped up its inflation forecast from 4.3% to 5.2% for 2022 but anticipates it will decelerate quickly in 2023 to 2.6% and get to 2.2% by the end of 2024.
- The median forecast from the Fed calls for the federal funds rate to end 2022 at 3.4% (it’s currently between 1.5% and 1.75%) and end 2023 at 3.8%. Then, the Fed expects to start cutting rates, with the 2024 end-of-year rate at 3.4% and the longer-term rate at 2.5%.
- It’s quite likely the Fed felt it was safe to go with 75 bps since the market was already pricing that in. The mentality could be, “Hey, if the market will let us, why not?”
- There were a lot of other central bank moves this week. Switzerland’s central bank hiked rates by 50 bps, its first rate hike in 15 years. Taiwan’s central bank hiked rates by 12.5 bps. The Bank of England hiked its policy rate by 25 bps (three voting members of its Monetary Policy Committee wanted a 50-bp hike).
- Just a few days after reopening cities in China, the government started conducting mass testing due to a COVID-19 outbreak. China’s industrial production rose a better-than-expected 0.7% year over year in May. Year-over-year retail sales were down 6.7%, showing the weight of COVID-19 lockdowns. However, this report was slightly better than April’s 11.1% year-over-year decline. In June, the government started reopening locked-down areas, so we should see the retail sales numbers bounce sharply.
- The Bank of Japan intervened in the market for Japanese debt to keep the yield on the 10-year Japanese government bond at or below 25 bps. At the central bank’s policy meeting, it made no changes to the stance of monetary policy, reaffirming its commitment to low rates.
- The European Central Bank held an emergency meeting to discuss what it can do about the growing divide between German government bond yields and Italian government bond yields. This “fragmentation” of yields is a worry of policymakers, so they have a plan to reinvest proceeds from their massive bond portfolio more toward those higher-yielding countries than toward the lower-yielding countries.
- U.S. retail sales fell in May as spending on big-ticket items declined while gasoline spending rose. Tighter financial conditions hurt spending on things that need to be financed, but high gasoline prices can also be a drag as consumers wait to spend on these items in favor of filling the tank.
- Russia-Ukraine update:
- Russia closed off the bridges of Severodonetsk, a city in Ukraine with the most intense fighting. This cuts off civilian evacuation routes.
- Russia has been cutting its gas shipments to Europe, pushing natural gas prices even higher. Gazprom, the Russian-owned supplier, claimed the reduction was due to technical issues, but it’s an interesting coincidence that the cuts coincided with a visit by German Chancellor Scholz, French President Macron, and Italian Prime Minister Draghi to Ukraine. Austria’s energy regulator did say the timing is likely just a coincidence.
- The European Commission recommended Ukraine be granted candidate status to become a member of the European Union.
- President Biden will travel to Saudi Arabia in July.
The week to come
- Now that we have a bunch of central bank meetings out of the way, we’re likely to get a bunch of Fed speakers—so we can parse their every word to figure out what they really think.
- In the U.S., we get existing-home sales data for May on Tuesday and then new-home sales data for May on Friday.
- The biggest data releases will likely be on Thursday, with the preliminary June survey results from various purchasing manager surveys for eurozone countries and for the U.S.
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