How will the markets react to the prospect of a Fed tapering?

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Does the Federal Reserve’s signal plan to reduce its bond purchases in times of crisis?

The two-day U.S. central bank meeting that ends on Wednesday will be a priority for many investors looking for clues as to when the Federal Reserve will start cutting its monthly purchases of $ 120 billion in government bonds.

In his August speech at the Jackson Hole Symposium, Fed Chairman Jay Powell indicated that the central bank’s policy-making committee may soon start cutting its stimulus programs in the era of the pandemic to two conditions: “substantial progress” is made towards maximum employment and towards an average inflation rate of 2%. The inflation target has been met, Powell admitted, and the labor market is on the right track.

But August employment figures were weaker than expected, which could hold back the Fed’s hand for now.

“We expect the Federal Open Market Committee to open the door to a possible cutback announcement in November, subject to a solid job gain in September. We think the obstacle is around 750,000 [jobs added], which should be erased fairly easily, ”Jefferies analysts wrote.

The Fed’s dot plot, a map of the expectations of Fed officials regarding the development of US interest rates over the next few years, will also be in the spotlight. The plot could be a market shift, especially if expectations for the surge cycle are advanced.

Meghan Swiber, U.S. rate strategist at Bank of America, said she expected the midpoints for 2022 and 2023 to remain unchanged from June, reflecting increases from 2023. But the dot plot will provide for the first time an overview of expectations for 2024.

“We expect them to show three more rate hikes in 2024. The dots reflect the baseline scenario of FOMC participants, so there is a risk that this will be more hawkish relative to market prices,” he said. Swiber said. Kate Duguid

How will the Bank of England react to a sharp rise in inflation?

Investors will closely follow the Bank of England’s response to a surprise rise in inflation at its next policy meeting on Thursday. The annual rise in consumer prices in the UK accelerated to 3.2% in August – the highest inflation rate since 2012 – according to data from last week, well above l BoE’s 2% target.

While BoE policymakers had predicted an increase towards the end of the year, the faster-than-expected recovery raised eyebrows in Threadneedle Street.

“UK inflation has jumped well above the rates we, the market and the BoE anticipated at the start of the year,” said Kallum Pickering, senior economist at Berenberg.

At its last meeting, the UK central bank signaled that a slight tightening would be needed to contain inflationary pressures. According to the latest data, Gov. Andrew Bailey could signal the time for an interest rate hike is approaching by signaling that officials are comfortable with current market expectations, according to Steffan Ball, Britain’s chief economist at Goldman Sachs. Investors expect the bank rate to rise to 0.25% by May of next year, from 0.1% currently.

A hawkish signal from the BoE would likely give sterling a boost and push gilt yields higher.

With two new members joining the BoE’s rate-setting committee this month, including chief economist Huw Pill, Ball said it was likely that a majority of members now believed the minimum terms for the tightening policies were met.

“This news implies a rate hike sooner than we previously thought,” he said. Tommy stubbington

What path will Scandinavian regulators take?

This will be the story of two Scandinavian central banks this week.

Norway is almost certain to become the first central bank in the G10 group of major currencies to raise interest rates after the pandemic on Thursday.

But two days earlier in Stockholm, the Swedish Riksbank is expected to keep rates at zero and suggest they will stay there for years to come. In July, the central bank suggested that rates would be held until the end of 2024 at the earliest.

As James Pomeroy, an economist at HSBC, wrote: “While central banks around the world choose to have very different views on monetary policy, it can be said that nowhere in the world does this divide. is more evident than in Scandinavia. “

Much of the difference stems from how the two central banks view their mandates and how they have behaved in previous crises. The Riksbank is still marked by a premature rate hike in 2011 only to have to lower them again shortly after. Its main target is 2 percent inflation, and it has been striving to achieve that for years and is therefore reluctant to start raising rates anytime soon.

But Norges Bank has shown more flexibility and a greater focus on financial stability, particularly concerned about strong house prices. It raised rates in 2018 and 2019 before dropping from 1.5% to zero in a few weeks at the start of the pandemic. The Norwegian economy is now doing well and the central bank wants to start normalizing its policy.

More interesting in the short term for the Riksbank is how it manages its balance sheet and when it might start to cut back on its bond purchases. Still, most economists expect this to happen no earlier than next year and the Riksbank to remain unchanged for now. Richard milne