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The Macro Viewpoint - Fed and ECB rate hikes, the digital USD
22 Plays3 years ago
In this edition we explain why we now expect more aggressive monetary policy tightening by the Fed and ECB, and consider whether the US is getting closer to launching a new digital version of the dollar. Disclaimer.
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Transcript
Introduction to HSBC Global Viewpoint
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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Thank you for listening.
Monetary Policy Outlooks for Fed and ECB
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You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the past week by our team of economists and strategists.
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Coming up this week, we look at the monetary policy outlook for the Federal Reserve and the ECB and whether rate rises could dent inflation and growth.
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And in the currency markets, we look at whether the US is getting closer to launching a new digital version of the dollar.
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This podcast was recorded on Thursday, the 10th of February, 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
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Hello, I'm P.S.
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Butler in London.
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And I'm Aline Van Dyne in New York.
US Inflation and Fed's Interest Rate Hike
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Inflation in the US and Eurozone remains at elevated levels, increasing the pressure on central banks to tighten monetary policy.
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In a moment, we'll look at how the ECB might react.
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But first, we're going to focus on the Federal Reserve.
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Ryan Wang, our US economist, joins us now.
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Ryan, market expectations have shifted and quite a number of interest rate hikes are now being priced in from the Fed.
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What's the story here?
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Eileen, that's right.
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Financial markets have reacted to recent economic data, including the jobs report and the CPI report for the month of January.
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And in both cases, the economic data tend to point towards conditions that may prompt the Fed to move more quickly and more aggressively in terms of raising policy rates over the course of this year.
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And already you can see that federal funds futures are pricing in a roughly even chance that
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The committee could start off with a 25 basis points or a 50 basis points increase at its next policy meeting in March.
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And then over the course of this year, well over 100 basis point of rate hikes are priced into markets.
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And so I think this reflects a combination of factors.
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One, the jobs data suggests that the economy has enough momentum to be able to withstand some rate increases.
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And secondly, the inflation data remains stubbornly sticky
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And so that means the policymakers will need to tighten monetary policy in order to restrain demand and bring supply and demand conditions into better balance.
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So in terms of the economic impacts, will this actually slow growth in the U.S.?
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Well, I think that's going to become a key issue as this year unfolds.
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If you look at the most recent projections from FOMC policymakers, they put the longer run or neutral federal funds rate as somewhere between 2% and 3%.
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And so our policy path now envisions that the actual federal funds rate will be approaching the lower end of these estimates.
Trends in US Core Inflation
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And so
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We think GDP growth will decelerate over the year ahead thanks to the combination of fading fiscal stimulus and less accommodative monetary policy.
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So rate hikes will be needed to control inflation and help bring it lower, but that's also likely to have an impact on economic growth.
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Ryan, we just had another inflation update, higher than expected CPI.
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What's driving inflation?
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What's the thing to look at there?
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Well, that's right.
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Inflation stayed elevated really for the fourth month in a row in January.
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And we're still of the view that core inflation could peak sometime around March and perhaps begin to decline around the second quarter of this year.
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But what is becoming increasingly clear is that even if inflation rates do fall, they will be remaining at very elevated levels.
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And that picture is just reinforced with each of these elevated levels.
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inflation reports that we get from month to month.
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The latest increase saw broad based upward pressure on items and categories like rents and used car prices and medical care services and commodities.
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And so it couldn't be pinned down to just one item or two.
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Brian, thanks so much for the update.
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Thanks, Elaine.
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So that's the view from the US.
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Let's look at the picture here in Europe, where Simon Wells, chief European economist, is also expecting more aggressive monetary tightening.
ECB's Inflation Concerns
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He joins me now.
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Simon, welcome to the podcast.
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Hi, Pez.
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So Simon, is it fair to say that the ECB is becoming more concerned about the inflationary environment?
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Yes, I think it is fair to say that.
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The ECB President Christine Lagarde said just a few weeks ago that she thought an interest rate rise this year was highly unlikely.
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In her comments about the February policy meeting, she said there was a unanimous concern about inflation across the governing council.
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And the reason for this is wholesale energy prices have risen again, and that may keep inflation elevated for longer.
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And of course, we keep seeing upside surprises to the level of inflation in the eurozone, with it hitting a new peak of 5.1%.
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in January.
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So yes, the ECB is, albeit a little later, starting to worry more about inflation as the other central banks are.
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So do you think they're likely to raise rates?
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Yes, I think this year there is a possibility that they will now raise rates.
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They could accelerate the
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steepness of the path with which they wind down their asset purchases.
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And they've made a very clear statement of intent in terms of the sequencing of their policy, which is to end quantitative easing first and then shortly after that have rate rises.
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So given the tone that came out of its February policy meeting, yes, I think that's quite likely.
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And what's the impact likely to be on growth then?
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Well, there are several headwinds to growth mounting.
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Of course, one of them would be tighter monetary policy, and this could have a modest drag on growth.
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But of course, higher inflation, particularly when it's concentrated in energy, is an income shock to consumers.
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And so people will have less to spend on other things, and that could weigh on demand as well.
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So there are headwinds to growth looming.
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And indeed, recently, we nudged down our forecast for eurozone growth this year from 3.8% to 3.5%.
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But Simon, isn't there a broader context in the environment that the ECB operates within that makes the pace of tightening possibly slower than the Fed or the Bank of England?
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Well, yes, of course, the ECB has more things to consider.
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It is managing monetary policy for 19 different economies.
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And we've already seen borrowing costs rise and spreads widen in some periphery economies.
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If the ECB was to act very abruptly, wind down asset purchases quickly and raise rates, it might risk destabilizing some of these government bond markets.
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And so it has to factor that in.
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And that's one reason why we think, although, yes, some tightening could now be on the cards, it will ultimately proceed quite cautiously.
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Simon, thank you very much.
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Thank you.
Pros and Cons of a Digital Dollar
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We finished this week in the currency markets where the Federal Reserve released its much anticipated white paper on a potential digital dollar.
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Paul Mackel, global head of FX research, has been looking at the findings and potential implications.
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He joins us now.
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Paul, this white paper has been a long time coming.
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What were the main messages from the Fed?
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Well, you're absolutely right.
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I mean, we've been waiting a number of months for this report to be released.
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But the advantages and disadvantages are laid out very clearly.
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For instance, the pros were thinking about meeting the future demands for payment services.
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Could it also support the international role of the dollar?
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And even promoting greater financial inclusion.
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These are a number of features that I think do stand out in favor of a digital dollar.
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Now, on the other side of the coin, and we're thinking about disadvantages,
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the Fed has highlighted how it may complicate the implementation of monetary policy.
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And how do you get the right balance between protecting privacy versus deterring criminal activity?
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Still a long journey ahead to try and navigate these pros and cons.
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But again, it's laid out very thoroughly.
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So what's your key takeaway from the report?
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Well, it's pretty clear that with the Fed finally releasing it,
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it does reveal that progress is being made.
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I mean, there's been a lot of debate about it over the last number of months.
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This paper actually shows that some progress is being made in terms of fostering that debate and trying to foster public dialogue, whether to try and adopt a digital dollar.
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And if a digital dollar were to be adopted, what key characteristics do you think it would need to have?
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The one feature that stands out most and is also similar for
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other central banks that are creating or investigating their own potential digital currencies comes down to the idea of privacy protection.
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And the way that the Fed defines it in this working paper is it would have to be a critical part of the design of a digital dollar.
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So I think that's very much that's something that has stood out in our eyes.
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Away from that, it's other factors or features such as being transferable.
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You have to make sure that it would be
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very efficient and widely accessible.
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And with privacy being a crucial concern, the Fed also highlights that it needs to be able to deter criminal activity.
Public Feedback on Digital Dollar
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So there's a number of interesting elements there that are needed for the Fed to proceed with a digital dollar.
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And Paul, where do you see the process going from here?
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Well, they're very explicit in terms of their thinking.
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That is that they're going to be collecting public feedback up until the 20th of May,
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this year.
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From there, presumably, it will enter another phase of discussion, possibly with the US administration or members of Congress, again, towards the next step with more formalization of the design of a potential digital dollar or a timeframe or timeline.
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Paul, thanks very much.
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Thank you very much.
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So that's all from us today.
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Thank you to our guests, Ryan Wang, Simon Wells, and Paul McEl.
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And from all of us here, thanks for listening.
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We'll be back again next week.
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Thank you for listening today.
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This has been HSBC Global Viewpoint Banking and Markets.
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For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.