Tag: Central banking

November 7, 2023

Central banks look to have hit peak rates. Here’s how markets think they’ll come down

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A trader works, as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange (NYSE) in New York City, July 26, 2023.

Brendan McDermid | Reuters

The world’s major central banks paused their interest rate hiking cycles in recent weeks and with data suggesting economies are softening, markets are turning their attention to the first round of cuts.

The U.S. Federal Reserve, European Central Bank and the Bank of England dramatically hiked rates over the last 18 months in a bid to tame runaway inflation.

The Fed on Wednesday held benchmark interest rates steady at a target range of 5.25%-5.5% for the second consecutive meeting after ending a string of 11 hikes in September.

Though Chairman Jerome Powell has been keen to reiterate that the Fed’s work on inflation is not yet done, the annual rise in the consumer price index came in at 3.7% in September, down from a pandemic-era peak of 9.1% in June 2022.

Yet despite Powell’s refusal to close the door on further increases in order to finish the job on inflation, markets interpreted the central bank’s tone as a slightly dovish pivot and rallied on the back of the decision.

The market is now narrowly pricing a first 25 basis point cut from the Fed on May 1, 2024, according to CME Group’s FedWatch tool, with 100 basis points of cuts now expected by the end of next year.

Since last week’s decision, U.S. nonfarm payrolls came in softer than expected for October, with job creation below trend, unemployment rising slightly and a further deceleration in wages. Although headline inflation remained unchanged at 3.7% annually from August to September, the core figure came down to 4.1%, having roughly halved over the last 12 months.

“Core PCE, which is the Fed’s preferred inflation metric, is even lower at 2.5% (3-month, annualized),” noted analysts at DBRS Morningstar.

“The lagged effects of a cooler housing market should reinforce the disinflationary trend over the next few months.”

But despite the dovish data points, short-term U.S. Treasurys reversed course to sell off on Monday, which Deutsche Bank’s Jim Reid chalked up to investors beginning to “wonder if last week’s narrative about rate cuts was overdone.”

“The U.S. economy is also proving more resilient than the U.K. and euro zone,” he said.

“For instance, market pricing for the Fed now implies a 16% chance of another rate hike, up from 11% on Friday,” Reid said in an email Tuesday.

“Moreover, the rate priced in by the December 2024 meeting was up +12.4bps to 4.47%. So there was a clear, albeit partial unwinding of last week’s moves.”

Reid also highlighted that this is the seventh time this cycle that markets have notably reacted on dovish speculation.

“Clearly rates aren’t going to keep going up forever, but on the previous 6 occasions we saw hopes for near-term rate cuts dashed every time. Note that we’ve still got above-target inflation in every G7 country,” he added.

The ECB

The European Central Bank late last month ended its run of 10 consecutive hikes to keep its benchmark interest rate at a record high of 4%, with euro zone inflation falling to a two-year low of 2.9% in October and the core figure also continuing to decline.

The market is also pricing almost 100 basis point of cuts for the ECB by December 2024, but the first 25 basis point reduction is mostly priced in for April, with economic weakness across the 20-member common currency bloc fueling bets that the central bank will be the first to start unwinding its tight policy position.

Gilles Moëc, group chief economist at AXA, said October’s inflation print confirmed and amplified the message that “disinflation has come in earnest to Europe,” vindicating the ECB’s “new-found prudence.”

ECB done with hikes barring unforeseen shocks, Bank of Portugal's Centeno says

“Of course, the current disinflation does not preclude the possibility that a ‘line of resistance’ would be found well above the ECB’s target. Yet, the confirmation that the euro area was flirting with recession last summer reduces this probability,” Moëc said in a research note Monday.

After the October meeting, ECB President Christine Lagarde batted away the suggestion of rate cuts, but National Bank of Greece Governor Yannis Stournaras has since openly discussed the possibility of a reduction in the middle of 2024 provided inflation stabilizes below 3%.

“This implicitly advocates a forward-looking version of monetary policy which takes lags into consideration to calibrate its stance. In clear, waiting for inflation to reach 2% before cutting rates would be ‘overkill,'” Moëc said.

“There is no doubt in our mind that the current dataflow is clearly favouring the doves, but the hawks are far from having given up the fight.”

The Bank of England

The Bank of England on Thursday kept its main policy rate unchanged at 5.25% for a second consecutive meeting after ending a run of 14 straight hikes in September.

However, minutes from last week’s meeting reiterated the Monetary Policy Committee’s expectations that rates will need to stay higher for longer, with the U.K. CPI holding steady at 6.7% in September. Despite this, the market on Monday was pricing around 60 basis points of cuts by December 2024, albeit starting in the second half of the year.

BNP Paribas economists on Thursday noted an “eye-catching” addition to the MPC’s guidance, which said its latest projections indicated that “monetary policy was likely to need to be restrictive for an extended period of time.”

Watch CNBC's full interview with Bank of England Governor Andrew Bailey

“Governor Andrew Bailey’s comments at the press conference indicated that this guidance was not intended as push-back on the market-implied policy rate path that underpins its latest forecasts, where a 25bp cut is not fully priced in until the second half of 2024,” they said.

“Instead, the intention was to indicate that cuts are not likely to feature as part of the conversation any time soon.”

At Thursday’s news conference, Bailey emphasized the upside risks to the bank’s inflation projections, rather than entertaining any suggestion of cuts on the horizon.

“While we don’t think it is necessarily indicative of a high risk of further hikes in the near term, we read it as a further sign that the MPC is not considering rate cuts and will not do so for a while,” BNP Paribas added.

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November 1, 2023

Fed holds rates steady, upgrades assessment of economic growth

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The Federal Reserve on Wednesday again held benchmark interest rates steady amid a backdrop of a growing economy and labor market and inflation that is still well above the central bank’s target.

In a widely expected move, the Fed’s rate-setting group unanimously agreed to hold the key federal funds rate in a target range between 5.25%-5.5%, where it has been since July. This was the second consecutive meeting that the Federal Open Market Committee chose to hold, following a string of 11 rate hikes, including four in 2023.

The decision included an upgrade to the committee’s general assessment of the economy. Stocks rallied on the news, with the Dow Jones Industrial Average gaining 212 points on the session.

“The process of getting inflation sustainably down to 2% has a long way to go,” Fed Chair Jerome Powell said in remarks at a news conference. He stressed that the central bank hasn’t made any decisions yet for its December meeting, saying that “The committee will always do what it thinks is appropriate at the time.”

Powell added that the FOMC is not considering or even discussing rate reductions at this time.

He also said the risks around the Fed doing too much or too little to fight inflation have become more balanced.

“This signals that while there is a potential risk for the Fed to do more, the bar has become higher for rate hikes, and we are clearly seeing this play out with two consecutive meetings of no policy action from the Fed,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

Economy has ‘moderated’

The post-meeting statement had indicated that “economic activity expanded at a strong pace in the third quarter,” compared with the September statement that said the economy had expanded at a “solid pace.” The statement also noted that employment gains “have moderated since earlier in the year but remain strong.”

Gross domestic product expanded at a 4.9% annualized rate in the third quarter, stronger than even elevated expectations. Nonfarm payrolls growth totaled 336,000 in September, well ahead of the Wall Street outlook.

There were few other changes to the statement, other than a notation that both financial and credit conditions had tightened. The addition of “financial” to the phrase followed a surge in Treasury yields that has caused concern on Wall Street. The statement continued to note that the committee is still “determining the extent of additional policy firming” that it may need to achieve its goals. “The Committee will continue to assess additional information and its implications for monetary policy,” the statement said.

Wednesday’s decision to stay put comes with inflation slowing from its rapid pace of 2022 and a labor market that has been surprisingly resilient despite all the interest rate hikes. The increases have been targeted at easing economic growth and bringing a supply and demand mismatch in the labor market back into balance. There were 1.5 available jobs for every available worker in September, according to Labor Department data released earlier Wednesday.

Core inflation is currently running at 3.7% on an annual basis, according to the latest personal consumption expenditures price index reading, which the Fed favors as an indicator for prices.

While that has decreased steadily this year, it is well above the Fed’s 2% annual target.

The post-meeting statement indicated that the Fed sees the economy holding strong despite the rate hikes, a position in itself that could prompt policymakers into a prolonged tightening stance.

In recent days, the “higher-for-longer” mantra has become a central theme for where the Fed is headed. While multiple officials have said they think rates can stay where they are as the Fed assesses the impact of the previous increases, virtually none have said they are considering cuts anytime soon. Market pricing indicates the first cut could come around June 2024, according to CME Group data.

Surging bond yields

The restrictive stance has been a factor in the surging bond yields. Treasury yields have risen to levels not seen since 2007, the earliest days of the financial crisis, as markets parse out what is ahead. Yields and prices move in opposite direction, so a rise in the former reflects waning investor appetite for Treasurys, generally considered the largest and most liquid market in the world.

The surge in yields is seen as a byproduct of multiple factors, including stronger-than-expected economic growth, stubbornly high inflation, a hawkish Fed and an elevated “term premium” for bond investors demanding higher yields in return for the risk of holding longer-duration fixed income.

There also are worries over Treasury issuance as the government looks to finance its massive debt load. The department this week said it will be auctioning off $776 billion of debt in the fourth quarter, starting with $112 billion across three auctions next week.

During a recent appearance in New York, Powell said he thinks the economy may have to slow further to bring down inflation. Most forecasters expect economic growth to tail off ahead.

A Treasury Department forecast released earlier this week indicated that the pace of growth likely will tumble to 0.7% in the fourth quarter and just 1% for the full year in 2024. Projections the Fed released in September put expected GDP growth at 1.5% in 2024.

In the wake of the Fed’s comments, the Atlanta Fed’s GDPNow growth tracker slashed expectations for fourth-quarter GDP almost in half to 1.2% from 2.3%. The gauge takes in data on a real-time basis and adjusts its estimates with the latest information.

Whitney Watson, co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, said it’s likely the Fed will keep its policy unchanged into next year.

“There are risks in both directions,” Watson said. “The rise in inflation expectations, owing to higher gas prices, combined with strong economic activity, preserves the prospect of another rate hike. Conversely, a more pronounced economic slowdown caused by the growing impact of higher interest rates might accelerate the timeline for transitioning to rate cuts.”

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September 14, 2023

Jim Cramer’s top 10 things to watch in the stock market Thursday

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My top 10 things to watch Thursday, Sept. 14

1. U.S. equities edge up in premarket trading, with investors largely betting the Federal Reserve won’t raise interest rates further when the central bank convenes next week. The S&P 500 is up 0.33%, while the Nasdaq Composite is 0.24% higher. U.S. government bond yields tick up, with that of the 10-year Treasury hovering just below 4.3%.

2. Oil prices continue to climb higher, with West Texas Intermediate crude, the U.S. oil benchmark, climbing above $90 a barrel for the first time since last November. Club oil holdings Coterra Energy (CTRA) and Pioneer Natural Resources (PXD) are up 1.48% and 0.88%, respectively, in early trading. Here’s the Club’s take on oil’s 10-month highs.

3. U.S. wholesale inflation climbs more than expected in August, according to the Labor Department’s monthly producer price index. At the same time, U.S. retail sales come in higher than predicted for last month, the Commerce Department reports, though the gains are largely driven by higher gasoline prices.

4. The European Central Bank raises interest rates by a quarter percentage point, bringing its deposit rate to a record-high 4%. The increase is the ECB’s 10th-conesecutive rate hike.

5. British chip designer Arm Holdings, owned by SoftBank Group (SFTBF), sets its highly anticipated initial public offering at $51 a share, valuing the company at over $54 billion. At this price, there’s not a lot of room for error. The firm will start trading Thursday on the Nasdaq under the stock symbol ARM.

6. The European Union launches an “anti-subsidy” investigation into China’s electric-vehicle companies, with Beijing calling the move “blatant protectionism.” Will Europe go 27.5% tariffs on Chinese cars? This could be a real issue for China.

7. China’s central bank is cutting the reserve requirement ratio for all banks, except those that have implemented a 5% reserve ratio, by 25 basis points from Sept. 15, in the government’s latest effort to prop up its faltering economy.

8. Jim Farley, the CEO of Club holding Ford Motor (F), rejects allegations by United Auto Workers President Shawn Fain that the automaker is not taking bargaining seriously ahead of a Thursday night strike deadline. Here’s the Club’s take on how a union strike could impact Ford.

9. KeyBank raises its price target on Chip designer Cadence Design Systems (CDNS) to $290 a share, up from $270, while reiterating an overweight rating on the stock. The firm’s call comes after KeyBank analysts met with early users of the company’s new AI-enabled EDA design portfolio. Cadence is a partner of AI chipmaker and Club holding Nvidia (NVDA).

10. Wolfe Research upgrades ecommerce firm Etsy Inc. (ETSY) to outperform, from peer perform, with a $100-per-share price target. The firm cites “many paths” for Etsy shares to outperform over the next 12-18 months.

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August 25, 2023

Fed Chair Powell calls inflation ‘too high’ and warns that ‘we are prepared to raise rates further’

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Federal Reserve Chair Jerome Powell on Friday called for more vigilance in the fight against inflation, warning that additional interest rate increases could be yet to come.

While acknowledging that progress has been made and saying the Fed will be careful in where it goes from here, the central bank leader said inflation is still above where policymakers feel comfortable. He noted that the Fed will remain flexible as it contemplates further moves, but gave little indication that it’s ready to start easing anytime soon.

“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in prepared remarks for his keynote address at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

The speech resembled remarks Powell made last year at Jackson Hole, during which he warned that “some pain” was likely as the Fed continues its efforts to pull runaway inflation back down to its 2% goal.

But inflation was running well ahead of its current pace back then. Regardless, Powell indicated it’s too soon to declare victory, even with data this summer running largely in the Fed’s favor. June and July both saw easing in the pace of price increases, with core inflation up 0.2% for each month, according to the Bureau of Labor Statistics.

“The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he said.

Powell acknowledged that risks are two-sided, with dangers of doing both too much and too little.

Powell's concerns about growth and the labor market being too strong are new, says Point72's Maki

“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he said. “Doing too much could also do unnecessary harm to the economy.”

“As is often the case, we are navigating by the stars under cloudy skies,” he added.

Markets were volatile after the speech, but stocks powered higher later in the day and Treasury yields were mostly up. In 2022, stocks plunged following Powell’s Jackson Hole speech.

“Was he hawkish? Yes. But given the jump in yields lately, he wasn’t as hawkish as some had feared,” said Ryan Detrick, chief market strategist at the Carson Group. “Remember, last year he took out the bazooka and was way more hawkish than anyone expected, which saw heavy selling into October. This time he hit it more down the middle, with no major changes in future hikes a welcome sign.”

A need to ‘proceed carefully’

Powell’s remarks follow a series of 11 interest rate hikes that have pushed the Fed’s key interest rate to a target range of 5.25%-5.5%, the highest level in more than 22 years. In addition, the Fed has reduced its balance sheet to its lowest level in more than two years, a process which was seen about $960 billion worth of bonds roll off since June 2022.

Markets of late have been pricing in little chance of another hike at the September meeting of the Federal Open Market Committee, but are pointing to about a 50-50 chance of a final increase at the November session. Projections released in June showed that almost all FOMC officials saw another hike likely this year.

Powell provided no clear indication of which way he sees the decision going.

“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.

However, he gave no sign that he’s even considering a rate cut.

“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks,” Powell said. “Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”

The chair added that economic growth may have to slow before the Fed can change course.

Gross domestic product has increased steadily since the rate hikes began, and the third quarter of 2023 is tracking at a 5.9% growth pace, according to the Atlanta Fed. Employment also has stayed strong, with the jobless rate hovering around lows last seen in the late 1960s.

“The basic thought that they’re close to done, they think they probably have a little bit more to do … that is the story they’ve been telling for a little while. And that was the heart of what he said today,” said Bill English, a former Fed official and now a Yale finance professor.

“I don’t think this is about sending a signal. I think this is really where they think they are,” he added. “The economy has slowed some but not enough yet to make them confident inflation is going to come down.”

Indeed, Powell noted the risk of strong economic growth in the face of widespread recession expectations and how that could make the Fed hold rates higher for longer.

“It was a balanced but not trend-changing speech, even if the Fed kept the ‘mission accomplished’ banner in the closet,” said Jack McIntyre, portfolio manager at Brandywine Global. “It leaves the Fed with needed optionality to either tighten more or keep rates on hold.”

Getting into details

While last year’s speech was unusually brief, this time around Powell provided a little more detail into the factors that will go into policymaking.

Specifically, he broke inflation into three key metrics and said the Fed is most focused on core inflation, which excludes volatile food and energy prices. He also reiterated that the Fed most closely follows the personal consumption expenditures price index, a Commerce Department measure, rather than the Labor Department’s consumer price index.

The three “broad components” of which he spoke entail goods, housing services such as rental costs and nonhousing services. He noted progress on all three, but said nonhousing is the most difficult to gauge as it is the least sensitive to interest rate adjustments. That category includes such things as health care, food services and transportation.

“Twelve-month inflation in this sector has moved sideways since liftoff. Inflation measured over the past three and six months has declined, however, which is encouraging,” Powell said. “Given the size of this sector, some further progress here will be essential to restoring price stability.”

No change to inflation goal

In addition to the broader policy outlook, Powell honed in some areas that are key both to market and political considerations.

Some legislators, particularly on the Democratic side, have suggested the Fed raise its 2% inflation target, a move that would give it more policy flexibility and might deter further rate hikes. But Powell rejected that idea, as he has done in the past.

“Two percent is and will remain our inflation target,” he said.

That portion of the speech brought some criticism from Harvard economist Jason Furman.

“Jay Powell said all the right things about near-term monetary policy, continuing to hope for the best while planning for the worst. He was appropriately cautious on inflation progress & asymmetric about the policy stance,” Furman, who was chair of the Council of Economic Advisers under former President Barack Obama, posted on X, the social media site formerly known as Twitter. “But wish he had not ruled out shifting the target.”

On another issue, Powell chose largely to stay away from the debate over what is the longer-run, or natural, rate of interest that is neither restrictive nor stimulative – the “r-star” rate of which he spoke at Jackson Hole in 2018.

“We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation,” he said. “But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”

Powell also noted that the previous tightening moves likely haven’t made their way through the system yet, providing further caution for the future of policy.

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May 29, 2023

Major central banks were expected to pause rate hikes soon. Now it’s not so clear cut

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Traders react as Federal Reserve Chair Jerome Powell is seen delivering remarks on a screen, on the floor of the New York Stock Exchange (NYSE) in New York City, March 22, 2023.

Brendan McDermid | Reuters

The market has long been pricing in interest rate cuts from major central banks toward the end of 2023, but sticky core inflation, tight labor markets and a surprisingly resilient global economy are leading some economists to reassess.

Stronger-than-expected U.S. jobs figures and gross domestic product data have highlighted a key risk to the Federal Reserve potentially taking its foot off the monetary brake. Economic resilience and persistent labor market tightness could exert upward pressure on wages and inflation, which is in danger of becoming entrenched.

The headline U.S. consumer price index has cooled significantly since its peak above 9% in June 2022, falling to just 4.9% in April, but remains well above the Fed’s 2% target. Crucially, core CPI, which excludes volatile food and energy prices, rose by 5.5% annually in April.

As the Fed earlier this month implemented its 10th increase in interest rates since March 2022, raising the Fed funds rate to a range of 5% to 5.25%, Chairman Jerome Powell hinted that a pause in the hiking cycle is likely at the FOMC’s June meeting.

However, minutes from the last meeting showed some members still see the need for additional rises, while others anticipate a slowdown in growth will remove the need for further tightening.

Fed officials including St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari have in recent weeks indicated that sticky core inflation may keep monetary policy tighter for longer, and and that more hikes could be coming down the pike later in the year.

The personal consumption expenditures price index, a preferred gauge for the Fed, increased by 4.7% year-on-year in April, new data showed Friday, indicating further stubbornness and triggering further bets on higher for longer interest rates.

Several economists have told CNBC over the past couple of weeks that the U.S. central bank may be forced to tighten monetary policy more aggressively in order to make a breakthrough on stubborn underlying dynamics.

According to CME Group’s FedWatch tool, the market currently places an almost 35% probability on the target rate ending the year in the 5% to 5.25% range, while the most likely range by November 2024 is 3.75% to 4%.

Patrick Armstrong, chief investment officer at Plurimi Group, told CNBC last week that there was a double-sided risk to current market positioning.

“If Powell cuts, he probably cuts a lot more than the market’s pricing, but I think there is above 50% chance where he just sits on his hands, we get through year-end,” Armstrong said.

“Because services PMI is incredibly strong, the employment backdrop incredibly strong, consumer spending all strong — it’s not the kind of thing where the Fed really needs to pump liquidity out there unless there is a debt crisis.”

European slowdown

The European Central Bank faces a similar dilemma, having slowed the pace of its hiking increments from 50 basis points to 25 basis points at its May meeting. The bank’s benchmark rate sits at 3.25%, a level not seen since November 2008.

Headline inflation in the euro zone rose in April to 7% year-on-year, though core price growth posted a surprise slowdown, prompting further debate as to the pace of rate rises the ECB should be adopting as it looks to bring inflation back to Earth.

The euro zone economy grew by 0.1% in the first quarter, below market expectations, but Bundesbank President Joachim Nagel said last week that several more rate hikes will be needed, even if that tips the bloc’s economy into recession.

The ECB shouldn't pause amid persistent inflation, former central banker says

“We are in a not at all easy phase, because inflation is sticky and it’s not moving as we would all hope it would, so it’s quite important as Joachim Nagel said today that the ECB stays open for further rate hikes as long as it needs until the drop-off is done,” former Bundesbank executive board member Andreas Dombret told CNBC last week.

“Of course, this will have negative implications and negative effects on the economy too, but I strongly believe that if you let inflation [de-anchor], if you let inflation go, those negative effects will be even higher, so it is very important for the credibility of the ECB that the ECB stays the course.”

The Bank of England

The U.K. faces a much tougher inflation challenge than the U.S. and the euro zone, and the U.K. consumer price inflation rate fell by less than expected in April.

The annual consumer price index dropped from 10.1% in March to 8.7% in April, well above consensus estimates and the Bank of England’s forecast of 8.4%. Meanwhile core inflation jumped to 6.8% from 6.2% in March, which will be of greater concern to the Bank’s Monetary Policy Committee.

With inflation continuing to prove stickier than the government and the central bank had hoped, now almost double the comparable rate in the U.S. and considerably higher than in Europe, traders increased bets that interest rates will need to be hiked further in order to curtail price rises.

Significant chance there won't be any Fed cuts this year despite market's certainty, CIO says

“Supply shocks, still de-anchored inflation expectations, fewer promotional discounting, and some potential margin building are likely keeping prices from normalising as quickly as traditional models would imply,” explained Sanjay Raja, chief U.K. economist at Deutsche Bank.

“We now expect a slower descent to target, and with price and wage inflation now likely to remain stronger than anticipated, we raise our terminal rate forecast to 5.25%. Risk management considerations will, we think, force the MPC to push rates higher and further than previously intended.”

Deutsche Bank now sees monetary policy shifting “firmly” toward a “higher for longer” era, Raja added.

The market is now pricing a 92% chance of a further 25 basis point rate hike from the Bank of England at its June meeting to take the main bank rate to 4.75%, according to Refinitiv data on Friday afternoon.

But despite the expectations for rates to rise further for longer, many economists still see a full reversal of course before the end of this year.

Berenberg had previously projected three cuts by the end of 2023, but cut this down to one in response to last week’s inflation print.

Signs of pivot from Fed will boost sentiment toward a higher market, CIO says

The German bank kept its end-2024 call for a 3% rate unchanged, projecting six 25 basis point cuts over the course of next year, but also put a 30% probability on a further 25 basis point hike in August to take the bank rate to 5%.

“Policy changes operate with uncertain effects and variable lags. As a consequence of the shift away from floating-rate mortgages towards fixed products over the past decade, the pass-through of monetary policy to consumption via the housing market takes longer than in the past,” said Berenberg Senior Economist Kallum Pickering.

“This highlights the risk that, if the BoE overreacts to near-term inflation surprises, it may set the stage for a big inflation undershoot once the full effects of its past policy decisions play out.”

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April 28, 2023

Swiss central bank promises regulation review after collapse of Credit Suisse

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Thomas Jordan, president of the Swiss National Bank (SNB), speaks during the bank’s annual general meeting in Bern, Switzerland, on Friday, April 28, 2023.

Bloomberg | Bloomberg | Getty Images

The Swiss National Bank on Friday pledged to review banking regulations during its annual general meeting in Bern, following recent turmoil involving Credit Suisse.

Set against a backdrop of protest over its action on climate change and its role in the emergency sale of Credit Suisse to Swiss rival UBS, Thomas Jordan, chairman of the governing board at the SNB, said banking regulation and supervision will have to be reviewed in light of recent events.

“This will require in-depth analysis … quick fixes must be avoided,” he said, according to a statement.

The central bank played a key role in brokering the rescue of Credit Suisse over the course of a chaotic weekend in March, as a flight of deposits and plummeting share price took the 167-year-old institution to the brink of collapse.

The deal remains mired in controversy and legal challenges, particularly over the lack of investor input and the unconventional decision to wipe out 15 billion Swiss francs ($16.8 billion) of Credit Suisse AT1 bonds.

The demise of the country’s second-largest bank fomented widespread discontent and severely damaged Switzerland’s long-held reputation for financial stability. It also came against a febrile political backdrop, with federal elections coming up in October.

Jordan said Friday that future regulation will have to “compel banks to hold sufficient assets which they can pledge or transfer at any time without restriction, and which they can thus deliver as collateral to existing liquidity facilities.” He added that this would mean his central bank could would be able to provide the necessary liquidity, in times of stress, without the need for emergency law.

A shareholder holding a placard reading in German: “Invest in the planet and not in its destruction” takes part in a protest ahead of a general meeting of of the Swiss National Bank (SNB) in Bern on April 28, 2023. (Photo by Fabrice COFFRINI / AFP) (Photo by FABRICE COFFRINI/AFP via Getty Images)

Fabrice Coffrini | Afp | Getty Images

The SNB faced questions and grievances from shareholders about the Credit Suisse situation on Friday, but the country’s network of climate activists also sought to use the central bank’s unwanted spotlight to challenge its investment policies. Activists failed to gain traction with a vote to reprimand the SNB’s investment decisions, with just 0.8% of shareholders backing the move, according to Reuters.

Unlike many major central banks, the SNB operates publicly-traded company, with just over half of its roughly 25 million Swiss franc ($28.1 million) share capital held by public shareholders — including various Swiss cantons (states) and cantonal banks — while the remaining shares are held by private investors.

More than 170 climate activists have now purchased a SNB share, according to the SNB Coalition, a dedicated pressure group spun out of Alliance Climatique Suisse — an umbrella organization representing around 140 Swiss environmental campaign groups.

Around 50 of the activist shareholders were attendance on Friday, and activists had planned to make around a dozen speeches on stage at the AGM, climate campaigner Jonas Kampus told CNBC on Wednesday. Protests were also held outside the event with Reuters reporting that the campaigners totaled 100, leading to tight security.

The group is calling for the SNB to dispose of its stock holdings of “companies that cause serious environmental damage and/or violate fundamental human rights,” pointing to the central bank’s own investment guidelines.

In particular, campaigners have highlighted SNB holdings in Chevron, Shell, TotalEnergies, ExxonMobil, Repsol, Enbridge and Duke Energy.

Members of a Ugandan community objecting to TotalEnergies’ East African Crude Oil Pipeline, were also set to attend on Friday, with one planning to speak on stage directly to the SNB directorate.

As well as a full exit from fossil fuel investments, activists are demanding that the SNB implement the “one for one rule,” — a capital requirement designed to prevent banks and insurers benefiting from activities that are detrimental for the transition to net zero.

In this context, the SNB would be required to set aside one Swiss franc of its own funds to cover potential losses for each franc allocated to financing new fossil fuel exploration or extraction.

Ahead of the AGM, the central bank declined on legal grounds to schedule three motions tabled by the activists, and said on Wednesday that it would not comment on protest plans, instead directing CNBC to its formal agenda. Yet Kampus suggested that just the process of submitting the motions itself had helped expand public and political awareness of the issues.

“From all sides, there is public pressure and also political pressure that the SNB needs to change things. At this moment, the SNB is really far behind in terms of their actions taken compared to other central banks,” Kampus told CNBC via telephone, adding that the SNB takes a “very conservative view” of its mandate regarding price stability and financial stability, which is “very narrow.”

The shareholders’ cause is also backed by a motion in parliament, with support from lawmakers ranging from the Green Party to the Centre [center-right party], which demands an extension of the SNB’s mandate to cover climate and environmental risks.

“While other central banks around the world are going well beyond the steps taken by the SNB in ​​this respect — the SNB has repeatedly taken the position that its mandate does not give it sufficient leeway to take climate risks fully into account in its decisions and monetary policy instruments,” reads the motion, filed on March 16 by Green Party lawmaker Delphine Klopfenstein Broggini.

Swiss National Bank chair: Maintaining stability is our main goal

“The present parliamentary initiative is intended to ensure this leeway and to make it clear that the SNB must take climate risks into account when conducting monetary policy.”

The motion argues that climate risks are “classified worldwide as significant financial risks that can endanger financial and price stability,” concluding that it is in “Switzerland’s overall interest that the SNB proactively address these issues” as other central banks are seeking to do.

Kampus and his fellow activists hope the national focus on the SNB after the Credit Suisse crisis provides fertile ground to advance concerns about climate risk, which he said poses a risk to the financial system that is “several times larger” than the potential fallout from Credit Suisse’s collapse.

“We feel that there is also a window of opportunity on the SNB side in that they maybe this time are a bit more humble, because they obviously also have done some things wrong in terms of the Credit Suisse crash,” Kampus said.

He noted that the central bank has always asserted that climate risk was incorporated into its models and that there was “no need for further exchange with the public of further transparency.”

Investor who predicted Credit Suisse decline says Swiss banking model is 'damaged'

“Very central to the SNB’s work is that the public just needs to trust them. Trust is something that is very important to the central bank, and to demand trust from the public without leading up to it or supporting it with further evidence that we can trust them in the long run is quite scary, especially when we don’t know what their climate model is,” he said.

The SNB has long argued that its passive investment strategy, which invests in global indexes, is part of its mandate to remain market neutral, and that it is not for the central bank to engage in climate policy. Activists hope mounting political pressure will eventually force a change in legislation to broaden the SNB’s mandate to accommodate climate and human rights as risks to financial and price stability.

UBS and Credit Suisse also faced protests from climate activists at their respective AGMs earlier this month over investment in fossil fuel companies.

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March 22, 2023

The Fed is likely to hike rates by a quarter point but it must also reassure it can contain a banking crisis

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The Federal Reserve is expected to raise interest rates Wednesday by a quarter point, but it also faces the tough task of reassuring markets it can stem a worse banking crisis.

Economists mostly expect the Fed will increase its fed funds target rate range to 4.75% to 5% on Wednesday afternoon, though some expect the central bank could pause its hiking due to concerns about the banking system. Futures markets were pricing in a roughly 80% chance for a rate rise, as of Tuesday morning.

The central bank is contemplating using its interest rate tools at the same time it is trying to soothe markets and stop further bank runs. The fear is that rising rates could put further pressure on banking institutions and crimp lending further, hurting small businesses and other borrowers.

“The broader macro data shows some further tightening is warranted,” said Michael Gapen, chief U.S. economist at Bank of America. He said the Fed will have to explain its double-barreled policy. “You have to show you can walk and chew gum at the same time, using your lender-of-last-resort powers to quell any fears about deposit flights at medium-sized banks.”

U.S. Federal Reserve Chair Jerome Powell addresses reporters after the Fed raised its target interest rate by a quarter of a percentage point, during a news conference at the Federal Reserve Building in Washington, February 1, 2023.

Jonathan Ernst | Reuters

Federal regulators stepped in to guarantee deposits at the failed Silicon Valley Bank and Signature Bank, and they provided more favorable loans to banks for a period of up to one year. The Fed joined with other global central banks Sunday to enhance liquidity through the standing dollar swap system, after UBS agreed to buy the embattled Credit Suisse.

Investors will be looking for assurances from Fed Chairman Jerome Powell that the central bank can contain the banking problems.

“We want to know it’s really about a few idiosyncratic institutions and not a more pervasive problem with respect to the regional bank model,” said Gapen. “In these moments, the market needs to know you feel you understand the problem and that you’re willing and capable of doing something about it. … I think they are exceptionally good at understanding where the pressure is that’s driving it and how to respond.”

A month of turmoil

Markets have been whipsawed in the last month, first by a hawkish-sounding Fed and then by fears of contagion in the banking system.

Fed officials begin their two-day meeting Tuesday. The event kicks off just two weeks after Powell warned a congressional committee that the Fed may have to hike rates even more than expected because of its battle with inflation.

Those comments sent interest rates soaring. A few days later, the sudden collapse of Silicon Valley Bank stunned markets, sending bond yields dramatically lower. Bond yields move opposite price. Expectations for Fed rate hikes also moved dramatically: What was expected to be a half-point hike two weeks ago is now up for debate at a quarter point or even zero.

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The 2-year Treasury yield is most sensitive to Fed policy.

Messaging is the key

Gapen expects Powell to explain that the Fed is fighting inflation through its rate hikes but then also assure markets that the central bank can use other tools to preserve financial stability.

“Things going forward will be done on a meeting-by-meeting basis. It will be data dependent,” Gapen said. “We’ll have to see how the economy evolves. … We’ll have to see how financial markets behave, how the economy responds.”

The Fed is scheduled to release its rate decision along with its new economic projections at 2 p.m. ET Wednesday. Powell will speak at 2:30 p.m. ET.

Gapen expects the Fed’s forecasts could show it expects a higher terminal rate, or end point for rate hikes, than it did in December. He said it could rise to about a level of 5.4% for 2023, from an earlier projection of 5.1%.

Jimmy Chang, chief investment officer at Rockefeller Global Family Office, said he expects the Fed to raise interest rates by a quarter point to instill confidence, but then signal it is finished with rate hikes.

“I wouldn’t be surprised if we get a rally because historically whenever the Fed stops hiking, going to that pause mode, the initial knee-jerk reaction from the stock market is a rally,” he said.

He said the Fed will not likely say it is going to pause, but its messaging could be interpreted that way.

“Now, at the minimum, they want to maintain this air of stability or of confidence,” Chang said. “I don’t think they’ll do anything that could potentially roil the market. … Depending on their [projections], I think the market will think this is the final hike.”

Fed guidance could be up in the air

Diane Swonk, chief economist at KPMG, said she expects the Fed is likely to pause its rate hiking because of economic uncertainty, and the fact that the contraction in bank lending will be equivalent to a tightening of Fed policy.

She also does not expect any guidance on future hikes for now, and Powell could stress the Fed is watching developments and the economic data.

“I don’t think he can commit. I think he has to keep all options on the table and say we’ll do whatever is necessary to promote price stability and financial stability,” Swonk said. “We do have some sticky inflation. There are signs the economy is weakening.”

Fed needs to 'call a timeout' and stop hiking rates, says Bleakley's Peter Boockvar

She also expects it will be difficult for the Fed to present its quarterly economic forecasts, because the problems facing the banks have created so much uncertainty. As it did during the Covid pandemic in March 2020, the Fed might temporarily suspend projections, Swonk said.

“I think it’s an important thing to take into account that this is shifting the forecast in unknown ways. You don’t want to overpromise one way or the other,” she said. Swonk also expects the Fed to withhold its so-called dot plot, the chart on which it shows anonymous forecasts from Fed officials on the path for interest rates.

“The issue is they can change their forecast up to Tuesday, but how does anyone know? You want the Fed to look unified. You don’t want dissent,” said Swonk. “Literally, these dot plots could be changing by the day. Two weeks ago, we had a Fed chairman ready to go 50 basis points.”

The impact of tighter financial conditions

The tightening of financial conditions alone could have the clout of a 1.5 percentage point hike in rates by the Fed, and that could result in the central bank cutting rates later this year, depending on the economy, Swonk said. The futures market is currently forecasting much more aggressive rate cutting than economists are, with a full percentage point — or four quarter-point cuts — for this year alone.

“If they hike and say they will pause, the market might actually be okay with that. If they do nothing, maybe the market gets nervous that after two weeks of uncertainty the Fed’s backing off their inflation fight,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “Either way we still have a bumpy road ahead of us.”

The Fed could also make a surprise move by stopping the runoff of securities from its balance sheet. As Treasurys and mortgages mature, the Fed no longer replaces them as it did during and after the pandemic to provide liquidity to financial markets. Gapen said changing the balance sheet runoff would be unexpected. During January and February, he said about $160 billion rolled off the balance sheet.

But the balance sheet recently increased again.

“The balance sheet went up by about $300 billion, but I think the good news there is most of that went to institutions that are already known,” he said.

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February 1, 2023

Here’s what the Federal Reserve’s 25 basis point interest rate hike means for your money

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The Federal Reserve raised the target federal funds rate for the eighth time in a row on Wednesday, in its continued effort to tame persistent inflation.

At its latest meeting, the central bank approved a more modest 0.25 percentage point increase after recent signs that inflationary pressures have started to cool.

“The easing of inflation pressures is evident, but this doesn’t mean the Federal Reserve’s job is done,” said Greg McBride, chief financial analyst at Bankrate.com. “There is still a long way to go to get to 2% inflation.”

What the federal funds rate means to you

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves do affect the borrowing and saving rates consumers see every day.

This rate hike will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing — putting more pressure on households already under financial strain.

“Inflation has shredded household budgets and, in many cases, households have had to lean against credit cards to bridge the gap,” McBride said.

On the flip side, “with rates still rising and inflation now declining, it is the best of both worlds for savers,” he added.

How higher interest rates can affect your money

1. Your credit card rate will rise

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and your credit card rate follows suit within one or two billing cycles.

“Credit card interest rates are already as high as they’ve been in decades,” said Matt Schulz, chief credit analyst at LendingTree. “While the Fed is taking its foot off the gas a bit when it comes to raising rates, credit card APRs almost certainly will keep climbing for at least the next few months, so it is important that cardholders continue to focus on knocking down their debt.”

Credit card annual percentage rates are now near 20%, on average, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders carry debt from month to month while paying sky-high interest charges — “that’s a bad combination,” McBride said.

At more than 19%, if you made minimum payments toward the average credit card balance — which is $5,474, according to TransUnion — it would take you almost 17 years to pay off the debt and cost you more than $7,528 in interest, Bankrate calculated.

Altogether, this rate hike will cost credit card users at least an additional $1.6 billion in interest charges in 2023, according to a separate analysis by WalletHub.

“A 0% balance transfer credit card remains one of the best weapons Americans have in the battle against credit card debt,” Schulz advised.

Otherwise, consumers should consolidate and pay off high-interest credit cards with a lower-interest personal loan, he said. “The rates on new personal loan offers have climbed recently as well, but if you have good credit, you may be able to find options that feature lower rates that what you currently have on your credit card.”

2. Mortgage rates will stay higher

Rates on 15-year and 30-year mortgages are fixed and tied to Treasury yields and the economy. As economic growth has slowed, these rates have started to come down but are still at a 10-year high, according to Jacob Channel, senior economist at LendingTree.

The average interest rate for a 30-year fixed-rate mortgage is now around 6.4% — up almost 3 full percentage points from 3.55% a year ago.

“Relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel said.

This rate hike has increased the cost of new mortgages by around 10 basis points, which translates to roughly $9,360 over the lifetime of a 30-year loan, assuming the average home loan of $401,300, WalletHub found. A basis point is equal to 0.01 of a percentage point.

“We’re still a ways away from the housing market being truly affordable, even if it has recently become a bit less expensive,” Channel said.

Other home loans are more closely tied to the Fed’s actions. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.

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3. Auto loans will get more expensive

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans, so if you are planning to buy a car, you’ll shell out more in the months ahead.

The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% last year.

The Fed’s latest move could push up the average interest rate even higher, although consumers with higher credit scores may be able to secure better loan terms or look to some used car models for better deals.

Paying an annual percentage rate of 6% instead of 4% would cost consumers $2,672 more in interest over the course of a $40,000, 72-month car loan, according to data from Edmunds.

“The ever-increasing costs of financing remain a challenge,” said Ivan Drury, Edmunds’ director of insights.

4. Some student loans will get pricier

Federal student loan rates are also fixed, so most borrowers won’t be affected immediately. But if you are about to borrow money for college, the interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and any loans disbursed after July 1 will likely be even higher.

If you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates, which means that as the central bank raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.

Currently, average private student loan fixed rates can range from just under 4% to almost 15%, according to Bankrate. As with auto loans, they also vary widely based on your credit score.

For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.

the savings account rates at some of the largest retail banks, which have been near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.

Also, thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank.

Rates on one-year certificates of deposit at online banks are even higher, now around 4.75%, according to DepositAccounts.com.

As the Fed continues its rate-hiking cycle, these yields will continue to rise, as well. However, you have to shop around to take advantage of them, according to Yiming Ma, an assistant finance professor at Columbia University Business School.

“If you haven’t already, it’s really important to benefit from the high interest environment by getting a higher return,” she said.

Still, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time.

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