It is a central bank jamboree this week with 13 policy meetings on tap, highlighted by three of the G7 — the FOMC, BoE, and BoJ. They, and most others, are expected to announce a steady policy stance. While the BoJ will be firmly on hold, the Fed is seen importantly guiding toward the QE exit, while the BoE will likely remain on course to finish QE purchases in December and be cautious in signaling a rate hike before 2022. The SNB is expected to highlight the need for negative rates while awaiting directional clues from the other core CBs. A couple of other EM banks are already out the door on a tightening road, and a few others are still on an easing trajectory.
Tomorrow the BoJ and FOMC are front and center. There has been considerable angst since before the August Jackson Hole summit regarding whether the Fed would be announcing a timeline for QE tapering by the fall. Clearly a lot of progress has been made since the pandemic and indeed some indicators are above their pre-pandemic levels though and the question for the Committee is whether there has been “substantial further progress.” Signs of slipping Q3 growth should give policymakers pause; indeed the Q3 GDP forecast has been revised to a 5.6% pace of growth from 7.0% previously. Additionally, Chair Powell indicated at the July 28 press conference there was still “substantial slack” in the labor market, and the disappointing 235k increase in jobs in August supports that view. His assessment and the various headwinds seen over the last 8 weeks should keep policymakers on a cautious, wait and see course, though hinting at a likely taper announcement later this year.
Along with any indication of QE tapering, much of the attention will be on the Summary of Economic Projections (SEP) and especially the dots that will be included.
Will the median dot be pulled forward to reflect a rate hike in 2022?
Will there be more hikes included, and how many will be seen for 2024?
The Fed is expected to mostly repeat their funds rate estimates, though with some up-drift, and an upshift in the 2023 median to 0.6% from 0.4%. Estimates will be introduced for 2024, and these figures are expected to largely mimic the current 2023 growth and inflation estimates, with a 1.4% median funds rate estimate. As for the other projections, a sharp cut for 2021 GDP growth is expected, huge 2021 boosts in the PCE chain price estimates, and a slight lift in the jobless rate estimate.
On the BoJ side, rates are expected to remain unchanged at -0.1% in the policy meeting. It was eased to that all-time nadir from 0.1% in January 2016. The 10-year bond yield is expected to be maintained near 0%. The Bank’s view on the economy and exports and production is expected to be downgraded due to pandemic issues, including the closure of China’s third largest port as well as various regional factory closures due to chip shortages. The shortages are expected to persist into year-end at least which should potentially lead to weakness for the remainder of the year.
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Andria Pichidi
Market Analyst
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