Greetings, forex friends! The month will soon end and most of the major central banks have already had their say, so I thought that now would be a good time to make a little central bank roundup. And today, I’ll begin with the Fed, the BOE, the ECB, and the SNB.
U.S. Federal Reserve (Fed)
- Fed voted to hike by 25 bps during the June meeting
- Target range for Fed Funds Rate is now between 1.75%-2.00%
- Path for the Fed Funds Rate revised to reflect up to two more hikes this year
- Dot plot shows 8 of the 15 FOMC members were open to at least two more hikes this year
- Trump’s trade policies still not a problem (for now)
Fed officials voted unanimously in favor of a rate hike during the June 13 FOMC statement, raising the target range for the Fed Funds Rate by 25 basis points from 1.50%-1.75% to 1.75%-2.00%.
The Fed also slightly upgraded its growth forecasts for 2018, as well as its inflation projections for 2018 and 2019.
More importantly, the Fed also upgraded the projected path of the Fed Funds Rate to reflect the possibility of up to two more hikes this year (only one more hike left originally).
Moreover, the Fed’s “dot plot” showed that 8 of the 15 FOMC member were open to the idea of two more hikes this year. Admittedly, however, the “dot plot” doesn’t distinguish between voting and non-voting FOMC members, so the Fed may not necessarily be able to deliver on two more hikes this year.
However, despite the upgrades to the Fed’s inflation outlook projected path for the Fed Funds Rate, Fed Chair Powell stressed during the FOMC presser that:
“The recent inflation data have been encouraging, but after many years of inflation below our objective, we do not want to declare victory.”
Powell was also asked about Trump’s policies, including his trade policies.
And Powell replied that with regard to Trump’s fiscal policies:
“Committee participants — generally believe that the fiscal changes — and that includes both the tax cuts, individual and corporate, and the spending changes — will provide meaningful support to demand, significant support to demand over the course of the next three years.”
With regard to Trump’s trade policies, however, Powell tried to dance around the question by saying that:
“Congress has very specifically given authority over trade to the executive branch, so I wouldn’t comment on any particular specific trade actions.”
Powell did eventually mention that the Fed’s contacts among business leaders are saying that “companies [are] holding off on making investments and hiring people.”
Even so, “right now we don’t see that in the numbers at all,” according to Powell.
Powell then tried to sound optimistic by saying that:
“The economy is very strong. The labor market is strong. Growth is strong. We really don’t see it in the numbers. It’s just not there. But—so I would put it down as more of a risk”
Bank of England (BOE)
- The BOE voted to keep the Bank Rate at 0.50% in June
- Vote to maintain the Bank Rate was not unanimous
- Ian McCafferty and Michael Saunders voted for a rate hike (again)
- BOE Chief Economist Andy Haldane also voted for a rate hike
- Overall, BOE still has a hiking bias
- BOE may start to unwind its balance sheet earlier
- McCafferty will be leaving come September
- Jonathan Haskel will replace McCafferty
- Haskel is not as hawkish as McCafferty
The BOE voted once again to maintain its current monetary policy during the June 21 BOE statement.
And while BOE officials unanimously voted to maintain stock of purchased government bonds and corporate bonds at £435 billion and £10 billion respectively, the vote to maintain the Bank Rate at 0.50% was not unanimous since Ian McCafferty and Michael Saunders voted for a rate hike yet again.
More surprisingly, BOE Chief Economist Andy Haldane also voted for a rate hike.
And according to the minutes of the BOE MPC meeting, McCafferty, Saunders, and Haldane voted for a rate hike then and there because they thought that:
“[T]he most recent indicators of labour demand and pay settlements indicated some upside risks to the expected pickup in average weekly earnings and unit wage cost.”
Moreover, the three hawks “had a higher degree of confidence that the slowdown in Q1 was temporary or erratic and would largely be unwound.”
To be fair, though, the other BOE MPC members also thought “that the softness of activity in the first quarter had been largely temporary.”
Moreover, the other BOE Members still had a hiking bias since they think that “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon.”
Other than that, the BOE announced that:
“[T]he MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%, compared to the previous guidance of around 2%.”
In other words, the BOE is saying that it may start unwinding its balance sheet once the Bank Rate hits 1.5%, so the BOE is saying here that it may start trimming its balance sheet earlier, which is a hawkish message. 1.50% seems so far away, though, given that the Bank Rate currently stands at 0.50%.
And as a side note, BOE super hawk McCafferty will be leaving come September. And unfortunately (for rate hike junkies), McCafferty’s replacement appears to be a bit more cautious than McCafferty.
As for specifics, Incoming MPC Member Jonathan Haskel thinks that wages remain subdued and he also disclosed during his June 26 appointment hearing that:
“I did respond in December 2017 to the FT’s survey of UK economists asking them for their projections this year, 2018. In that survey I forecasted that interest rates would stay low since wage pressure would be weak.”
Economic conditions in the U.K. have apparently improved enough that he conditionally agreed (for now) with the BOE’s hiking bias when he said that:
“At this stage, I would merely say that given current conditions and current economic data, I agree with the broad direction of travel.”
The European Central Bank (ECB)
- ECB maintained its current monetary policy
- However, ECB announced that QE will be tapered to €15B per month until December
- And after that, “net purchases will then end“
- No rate hikes “at least through the summer of 2019“
- In other words, no rate hikes until the October 2019 ECB meeting (at the earliest)
The ECB announced no changes to its current monetary policy during the June 14 ECB Statement.
The refinancing rate therefore is steady at 0.00%, the marginal lending rate stands pat at 0.25%, the deposit rate is maintained at -0.40%, and the ECB’s extended asset purchase or QE program is affirmed at a monthly pace of €30 billion until September 2018.
However, the ECB also announced future changes to its monetary policy.
To be more specific, the ECB stated that (emphasis mine):
“The Governing Council anticipates that, after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.”
That’s a rather hawkish forward guidance, but the ECB was quick to give it a dovish spin by also explicitly stating that (emphasis mine):
“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”
Draghi was asked during the ECB presser to clarify what the phrase “through the summer of 2019” means, namely if it includes the September 2019 ECB meeting.
And the Draghster basically shot down the idea of a September 2019 rate hike when he replied as follows:
“[D]oes it mean September? Well, if it had meant September, we would’ve said September.”
Ouch! And to give the ECB’s forward guidance its proper context, just know that market players were already pricing in a rate hike as early as June 2019, market analysts say.
And Draghi is heavily implying here that the ECB won’t be hiking until the October 2019 ECB statement at the earliest.
ECB Member Vitas Vasiliauskas appears to confirm this while also implying that a rate hike will come after the October 2019 ECB meeting when he said the following during a June 25 interview.
“In this part of the world, summer means until the end of September.”
“I think from the current perspective, maybe we can think about the possibility to discuss further steps in autumn [next year], but as I said, discuss.”
Going back to Draghi’s presser, Draghi was also asked about Trump’s trade policies and Draghi replies as follows:
“[I]t’s important to know that the [ECB’s] projections do not contain the effects of trade measures that have not been implemented yet. They only contain the effects of the measures that have been implemented already and the direct effects of these measures are pretty limited. Of course to the extent that there is going to be a general retaliation or a further implementation of further measures, the effects can be more significant.”
In simpler terms, an escalating trade war hasn’t been fully taken into account in the ECB’s projections and the negative effects could be “significant” which implies that trade-related developments may impact the direction of the ECB’s monetary policy.
Swiss National Bank (SNB)
- No plans to end expansionary monetary policy yet
- Still threatening to “intervene” in the forex market
- Still thinks that CHF “remains highly valued”
The SNB announced no changes to its monetary policy during the June 21 SNB statement, which surprised absolutely no one.
The target range for the Libor rate is therefore still between -1.25% and -0.25%, while interest rate on sight deposits are still at -0.75%.
The SNB stated that “the value of the Swiss franc has barely changed since the monetary policy assessment of March 2018,” so the SNB was quick to add that the Swiss franc “remains highly valued.”
And since the Swissy “remains highly valued,” the SNB renewed its commitment to “intervene in the foreign exchange market as necessary.”
The SNB also repeated its justification keeping negative rates and for manipulating its currency, er, I mean “intervene in the foreign exchange market” by repeating its mantra that:
“These measures keep the attractiveness of Swiss franc investments low and ease pressure on the currency.”
And in his presser, SNB Chair Thomas Jordan stressed that:
“The risks [to the Swiss economy] are more to the downside, reflecting the more difficult political situation in Italy which had a big impact on international financial markets.”
Jordan also explained why the SNB is in no hurry to hike rates when he said that:
“We will adjust our monetary policy at the point when it is necessary. But it is of no use to change monetary policy too early in order to provoke an appreciation in the Swiss franc and then we will again have monetary conditions which are too tight.”
In other words, it’s all about the Swissy’s exchange rate.