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The Macro Brief – Timing of rate cuts
29 Plays1 year ago
We assess the potential path of monetary policy on both sides of the Atlantic with Ryan Wang, US Economist, and Liz Martins, Senior UK Economist. Disclaimer: https://www.research.hsbc.com/R/61/VgCSnpv. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Introduction to HSBC Global Viewpoint Podcast
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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The following podcast was recorded on the 1st of February 2024 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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And don't forget that you can follow this weekly podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macrobrief.
Monetary Policy Discussion with Piers Butler and Aline Van Dyne
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Hello and welcome to The Macrobrief.
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I'm Piers Butler in London.
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And I'm Aline Van Dyne in New York.
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Today we're going to be taking a look at the path of monetary policy for two of the global major central banks.
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The Fed and the Bank of England have both just held their first meetings of the year, and with inflation on its way down, expectations are that rate cuts could come sooner rather than later.
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So what do our economists think?
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In a moment, we'll get the view from the UK.
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But let's start here in our studio in New York, where I'm joined by Ryan Wang, our US economist.
Will the Fed Cut Rates Soon?
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So we've just had the FOMC's first meeting.
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Are rate cuts imminent?
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Well, it certainly was an interesting meeting.
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Markets are continuing to price in pretty substantial rate cuts for this year.
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They have slightly reduced the likelihood that the first rate cut may come in March, according to market pricing.
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And that was a direct result of Fed Chair Powell's comments that
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Based on all the available data, he didn't think it was likely that the policymakers would have enough confidence about the inflation outlook to begin reducing rates in March.
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Our own forecast remains the same.
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We are looking for the first Fed rate cut to come in June, and we continue to expect 75 basis points of cumulative rate cuts in 2024.
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And that continues to be a little bit less, a fair bit less, actually, than what markets are pricing in for the balance of this year.
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So Ryan, let's get into some of the nitty gritty.
Powell's View on Inflation Control
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What did Powell and the FOMC say about inflation specifically?
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Are they concerned it's going to go back up or is it about the pace of decline or what is the focus there?
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Well, Fed Chair Powell made it clear that the Fed is pleased with the direction of travel on the inflation numbers that, according to Powell, the last six months have been good inflation data.
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And we can see what he means.
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If you look at the core PCE inflation rate, that was over 4% as recently as six months ago.
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And now it is just below the 3% level.
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So according to the Fed chair, what the policymakers are looking for is more confidence that those six months of good data will continue and that inflation is sustainably going to be at the 2% level.
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So what that tells us is that each monthly inflation number is going to be extremely important.
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In about a month's time, at the end of February, we will get the next release of core PCE inflation data.
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But in the middle of February, we will also have important numbers.
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Those are the CPI and the PPI.
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Now, of course, it's not just about inflation.
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Growth is also really important.
US GDP Growth and Its Impact on Fed Decisions
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Is the U.S. economy growing too strongly from the Fed's perspective?
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Well, this is a really interesting question.
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Over the past year, GDP growth in the United States has more or less persistently surprised to the upside relative to expectations.
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Even the most recent reading for fourth quarter GDP growth came in above 3%.
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Now, in the press conference, Fed Chair Powell said, well, that's not a problem.
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The Fed is not hoping for growth to deteriorate markedly.
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But at the same time, resilient economic growth does have implications for policy rates.
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It's one of the reasons the Fed can be and is likely to be somewhat more deliberate about delivering that first rate cut.
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So a lot to look out for, Ryan, on the inflation and the growth side.
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That's right.
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It's going to be an interesting year.
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Thanks, Ryan.
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Thanks, Eileen.
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So that's a story from the
Bank of England's Stance on Interest Rates
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US.
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Back to you, Piers, for the view from the UK.
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Thanks, Eileen.
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I'm joined in the studio by Liz Martins, our senior UK economist.
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Liz, welcome.
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Hi.
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So the headline is that the BOE keeps rates unchanged, and that seems uneventful.
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But actually, as the expression goes, the devil is in the detail.
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Firstly, what was not said and why was that significant?
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Well, yeah, exactly.
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So what was not said was what the BOE has been saying in the last few meetings, which is that they might need to raise interest rates again.
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So that's been the previous guidance.
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If inflation proves more persistent than we think, we may need to
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increase interest rates again.
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That's gone.
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So too has the line about it was a finely balanced decision.
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Should we hike?
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Should we not hike?
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That's gone as well.
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And it's been replaced with something more neutral and possibly even slightly with a bias towards cutting, which is this line about the committee will now keep under review how long it needs to maintain the current stance.
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And actually from the commentary in the press conference, our reading was how long we need to keep
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the current stance before we reduce interest rates, not until we either reduce or increase, but before we reduce it.
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So they are seeming to hint that the next move now is down as opposed to it
Internal Divisions in the BOE Committee
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might be up.
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Now we talk about the committee, but when we look at how the committee voted, there seems to be some quite deep divisions.
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Yeah, it was a three-way split this time.
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So quite interesting.
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Two people still wanted to raise interest rates, even though inflation has come down quite markedly since the last time.
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Six people wanted to keep Bankrate unchanged.
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And one member, Swati Dingra, who's been really on the dovish side for, well, the whole time she's been on the committee, she actually went for it and voted for a cut this time round.
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So different perceptions of where we are in the economic cycle and how
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worrying it is that inflation will stay more stay higher for longer and be more persistent.
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But yeah, very interesting going into the meeting.
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You know, Bloomberg had done a survey of who what economists thought the vote would be.
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And there were all kinds of different permutations of people voting for hikes and cuts and unanimous votes for no change.
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And actually, nobody predicted this exact permutation.
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So it was really uncertain.
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And it's definitely an interesting outcome.
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Is that, do you think, partly due to how difficult it is to forecast how inflation is and the speed at which inflation is going to come down?
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Yeah, for sure.
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I mean, I think it still remains a really mixed picture because we've had some upside news on inflation since the last meeting, which is the Red Sea risks.
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Also, the fact that demand seems pretty perky.
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The economy activity data is decent.
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So on that front, you might say, well, you know, inflation news is higher.
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But then again, there are other bits that point to the other direction, like falling vacancies or falling inflation expectations or falling shop price inflation data that we've had.
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So
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So it's definitely a mixed picture.
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And also I think that uncertainty about the vote was because we haven't heard much from the MPC really since December.
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They've all had a nice Christmas holiday and we haven't heard much what they're thinking about mandatory policy.
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So the consensus is still factoring in four 25 basis point cuts in 2024.
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That's a full percentage point.
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Where do we stand?
Future Rate Cuts by the BOE
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So we are a bit more cautious than that.
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The market has the first rate cut coming in June with a decent chance of it coming even in May.
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We think it will take a little bit longer and I think, you know, the Bank of England's comments today were consistent with that.
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So we think
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August for the first cut and then only a cut a quarter after that.
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So actually we've only got 50 basis points in our forecasts for this year and that is does reflect those upside risks that I mentioned you know the Red Sea, the oil prices and also the fact that the economy is is in decent shape or you know relatively and doesn't feel like it's in urgent need of stimulus.
Constraints on UK Fiscal Policy
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So let's talk about fiscal policy.
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We've spoken about that before on the podcast, particularly in an election year.
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But from what the chancellor was saying this week, there doesn't seem to be scope for a significant giveaway.
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That's right.
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Very disappointingly for the Chancellor, because I think the government wants to be cutting taxes ahead of the election.
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And it looked even at the beginning of the year as if the Office of Budget Responsibility was going to come along and say, here's another, I don't know, six, 10, 12 billion pounds of headroom, really allowing them to do that.
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The Treasury analysis now is saying that won't happen.
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There's only maybe an extra billion of headroom, which is, you know, very, very small.
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in the scheme of things.
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So on current analysis, there won't be as much room and that does pose a dilemma for the government.
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Things can change.
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So if inflation were to come a lot lower, in the meantime, if interest rate expectations will come a lot lower, then that would certainly help the Chancellor because the OBL will be forecasting lower
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debt interest.
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So on that score, they won't be thanking Andrew Bailey for today because the markets, if anything, moved in a slightly upward direction on interest rates, not the downward direction they would need to see for more room for manoeuvre.
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Plenty to look out for.
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I'm sure we'll have you back on the podcast.
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But for today, thank you for joining.
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Thank you.
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Now let's wrap things up with a look at some of the other key news from global research this week.
Challenges in the Oil Market for 2023
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Kim Fustier, head of European oil and gas research, says 2024 looks set to be a more difficult year for oil markets than last year.
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She expects OPEC's strategy of supply restraint to be challenged by sustained non-OPEC growth and a slowdown in global demand growth.
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Geopolitical risks limits the downside to prices, so overall Kim expects Brent to trade in a range of between $75 and $85 a barrel in the medium term.
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Sticking with the theme of geopolitics, our trade economist Shanela Rajanagam has been looking at how tensions in the Red Sea are straining supply chains.
Impact of Red Sea Tensions on Supply Chains
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Daily vessel transits via the Suez Canal have dropped around 45 percent, with container freight rates surging along key trade lanes.
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Chanel says that companies relying on a just-in-time manufacturing model are particularly vulnerable to any trade delays, and consumer goods could be increasingly caught up in the ongoing disruption.
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And if you have any questions on the Outlook for Trade, you can put them to Chanel at our next Live Insights event, taking place on the 27th of February at 10.30 UK time.
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For more details on how to register or for more details on anything we've talked about on the podcast, please email askresearch at hsbc.com.
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So that's it for this edition of the Macro Brief.
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Thanks very much for listening.
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We'll be back next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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Make sure you're subscribed to stay up to date with new episodes.