Here’s part 2 of my two-part series on the latest central bank biases. This time, we’ll be focusing on the Fed, the BOE, the ECB, and the BOJ.
U.S. Federal Reserve (Fed)
- Fed voted to hike by 25 bps during the March meeting
- Target range for Fed Funds Rate is now between 1.50%-1.75%
- Still open to two more hikes this year
- Dot plot shows 7 of the 15 FOMC members were were open to at least three more hikes this year
- Trump’s trade policies not a problem (for now)
Fed officials voted unanimously for a rate hike during the March 22 FOMC statement.
The target range for the Fed Funds Rate was therefore raised by 25 basis points from 1.25%-1.50% to 1.50%-1.75%.
Moreover, the Fed upgraded its growth forecasts from 2018 and 2019 while also projecting a lower jobless rate for the entire forecast period.
However, the Fed’s inflation forecasts for 2018 and 2019 were unchanged, despite the improved forecasts for the other economic indicators.
And since the Fed’s inflation forecasts were unchanged, it also followed that the Fed’s projected path for the Fed Funds Rate was unchanged in 2018. Even so, the Fed still projects two more hikes this year.
However, a look at the Fed’s dot plot shows that 7 of the 15 FOMC members were open to at least four hikes this year, or three more hikes after the March rate hike. Unfortunately, the dot plot doesn’t distinguish from voting and non-voting FOMC members.
Anyhow, freshly-minted Fed Chair Jerome Powell was asked about the dot plot and “what would it take to get to four rate hikes this year” during the FOMC presser. And, well, Powell skillfully danced around the question and ultimately evaded it.
At any rate, Powell was also asked about the Fed’s view on Trump’s trade policies. And Powell answered as follows (emphasis mine):
“[A] number of participants in this FOMC did bring up the issue of tariffs, and if I could summarize what came out of that. It was, first, that there’s no thought, I think, that changes in trade policy should have any effect on the current outlook. Second thing is, I would say is that a number of participants reported in, about their conversations with business leaders around the country and reported that trade policy has become a concern going forward for that group.”
Bank of England (BOE)
- The BOE voted to keep the Bank Rate at 0.50% in March
- Vote to maintain the Bank Rate was not unanimous
- Ian McCafferty and Michael Saunders voted for a rate hike
- Overall, BOE still has a hiking bias as of the March meeting
- Gertjan Vlieghe thinks 1-2 hikes per year is the way to go
- BOE open to the possibility of a May rate hike
- Brexit still a source of uncertainty, according to BOE
The BOE voted to keep the Bank Rate steady at 0.50% during the March 22 BOE statement.
BOE officials also voted to maintain stock of purchased government bonds and corporate bonds at £435 billion and £10 billion respectively.
The vote to maintain the BOE’s bond holdings was unanimous but the same can’t be said of the vote to keep the Bank Rate steady since Ian McCafferty and Michael Saunders voted for a rate hike then and there.
And according to the minutes of the BOE MPC meeting, “These members noted the widespread evidence that slack was largely used up and that pay growth was picking up, presenting upside risks to inflation in the medium term,” which is why they voted for a hike.
Also, it should be pointed out that even though the other BOE members voted not to hike, the minutes also noted that:
“As in February, the best collective judgement of the MPC remained that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.”
In simpler terms, the BOE has a hiking bias overall. And in a March 23 speech, BOE Member Gertjan Vlieghe even suggested that:
“The current central outlook is, in my view, consistent with one or two quarter-point rate increases per year over the forecast period.”
And going back to the minutes of the March 22 meeting, we get this nugget:
“The May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures.”
In other words, the BOE is open to the possibility of a rate hike by May, assuming economic conditions continue to evolve as expected (or better).
Of course, the BOE also expressed some concern about Brexit when it noted that:
“Developments regarding the United Kingdom’s withdrawal from the European Union – and in particular the reaction of households, businesses and asset prices to them – remain the most significant influence on, and source of uncertainty about, the economic outlook.”
Still, the BOE Financial Policy Committee (FPC) noted in their latest statement that “The UK banking system could continue to support the real economy through a disorderly Brexit.”
The European Central Bank (ECB)
- ECB maintained its current monetary policy
- However, easing bias on QE program was removed
- Even so, ECB stressed that monetary policy is “reactive“
- Not confident that rise in inflation is sustainable
- Euro’s relative strength “might weigh on inflation down the line“
The ECB maintained its current monetary policy during the March 8 ECB Statement.
To be more specific, the refinancing rate is still at 0.00%, the marginal lending rate is unchanged at 0.25%, the deposit rate is steady at -0.40%, and the ECB’s extended asset purchase or QE program is maintained at a monthly pace of €30 billion until September 2018.
However, the ECB also removed its easing bias on its QE program, which is a hawkish move.
Even so, the ECB tried to present a more neutral message by emphasizing that monetary policy is “reactive” which implies that the ECB is ready and willing to shift back to an easing bias if economic conditions deteriorate.
In his presser, ECB President Mario Draghi explained that the ECB is taking a cautious stance because “measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend.”
Draghi repeated this message again during his March 14 speech when he said that:
“[W]e [the ECB] still need to see further evidence that inflation dynamics are moving in the right direction. So monetary policy will remain patient, persistent and prudent.”
And while Draghi didn’t explicitly talk down the euro during the ECB presser, he was more direct and had this to say during his March 14 speech:
“The euro has appreciated since the beginning of last year, and according to our analysis, this has recently been driven more by exogenous factors … This might weigh on inflation down the line as it does not fully arise from stronger euro area fundamentals.”
However, there have been rumors going around that the ECB is supposedly shifting their focus towards interest rates, despite the ECB’s official stance that interest rates aren’t going anywhere anytime soon.
And ECB Member Jens Weidmann, via his March 26 speech, gave some credence to these rumors when he said that:
“The markets see a first interest rate increase around the middle of the year 2019, which is probably not entirely unrealistic.”
For now, however, the ECB’s official monetary policy stance is a neutral one, albeit with a clear bias towards tightening monetary policy.
Bank of Japan (BOJ)
- BOJ announced no changes to monetary policy
- Overnight call rate still at -0.10%
- “QQE With Yield Curve Control” framework still in place
- No predetermined amount (or limits) for JGB purchases
- No plans for an exit strategy from the ultra-loose monetary policy
- Kuroda open to the possibility of an exit, though
The BOJ announced no changes to its monetary policy during the March 9 BOJ statement.
As such, the overnight call rate is still at -0.10%. The BOJ also reaffirmed that it will still purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about ¥6 trillion and about ¥90 billion respectively.
Moreover, the BOJ’s so-called “QQE With Yield Curve Control” framework is still in place. The BOJ will therefore continue to buy up 10-year Japanese Government Bonds (JGBs) as needed in order to keep bond yields at around 0%.
The BOJ didn’t place a limit on the amount that can be purchased, but it did reiterate that it will “will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen.”
Also, the BOJ didn’t really give any forward guidance on when it plans to exit its ultra-loose monetary policy.
In a March 2 speech before the Japanese Diet, however, BOJ Governor Kuroda had this to say (emphasis mine):
“Right now, the members of the policy board and I think that prices will move to reach 2 percent in around fiscal 2019. So it’s logical that we would be thinking about and debating exit at that time too.”
“I’m not saying that the negative rate of 0.1 percent and the around 0 percent aim for 10-year bond yields will never change, but it is possible. We will be discussing that at each policy meeting.”
The BOJ therefore has a tightening bias. It just so happens that the Japanese economy is not yet ready in the BOJ’s view.
Later, Kuroda tried to weaken his hawkish message during the March 9 BOJ presser when he said that (emphasis mine):
“In our quarterly forecast issued in January, the BOJ board forecast inflation to reach 2 percent during fiscal 2019. But we’ve also said there was high uncertainty to the price and inflation expectation outlook. Even if our price goal is met during fiscal 2019, that doesn’t mean we will immediately exit ultra-easy policy.”
“There is still some distance from our price target, so we’re not in a stage now to discuss specifics of an exit strategy.”
That last bit heavily implies that the BOJ is definitely looking to exit its ultra-loose monetary policy, but Kuroda was quick to add the following, thereby presenting a more neutral tone overall:
“If the economy loses momentum to achieve our price target, we would of course consider easing policy further.”