Fed Chairman Jerome Powell prepares to deliver a speech at the Centennial Celebration of the Federal Reserve’s Division of Research and Statistics on November 8, 2023 in Washington, DC.
Chip Somodevilla | Getty Images
A number of major central banks will make their final interest rate decisions of the year in a crunch week that will test market bets on rate cuts in early 2024.
The Federal Reserve will kick off a crucial week on Wednesday, followed by a “Super Thursday” when the European Central Bank, the Bank of England, the Swiss National Bank and Norway’s Norges Bank meet.
Central bank policymakers are widely expected to keep interest rates steady, with the exception of Norway’s central bank, which warned it was likely to raise borrowing costs in December.
Investors will be looking to banks’ statements for clues about when interest rate cuts might begin next year as inflation continues to fall from its highest level in decades.
“The biggest risk in ‘risk-on’ is that the Fed doesn’t do what the market is telling it to do, which is to cut interest rates during 2024,” said David Neuhauser, chief investment officer at hedge fund Livermore Partners, said CNBC’s “Squawk Box Europe” on Monday.
“The market tells you one thing, so essentially what the market is doing is highlighting the credibility of the Fed … and we’ll see who’s right here.”
Interest rate cuts coming?
Market participants largely expect the Fed to keep interest rates at 5.25% to 5.50%, although traders expect a 25 basis point cut as early as March next year, according to the CME FedWatch tool.
However, the Fed has sought to push back market expectations for aggressive rate cuts next year.
Fed Chairman Jerome Powell warned earlier this month that it was “premature” to speculate about when monetary policy might be eased, suggesting that the central bank was “ready to tighten monetary policy when appropriate.”
Livermore Partners’ Neuhauser said high market expectations for rate cuts contradict Powell’s recent comments.
“There are two different dynamics at play: what the market is telling you and what Federal Reserve Chairman Powell is telling you. “Let’s see who has the credibility this time,” said Neuhauser.
Powell has also noted that policy is currently “well in the restrictive zone” and said the balance of risk between trading too much or too little is close to even.
“As we think about the Fed heading into next year, we think it makes sense for them to be careful about when and by how much to cut rates,” said Sam Zief, head of global foreign exchange strategy at JP Morgan Private Bank, told CNBC. Street Signs Europe” on Monday.
“Because their policy rate is so restrictive, when the unemployment rate is approaching neutral and inflation is approaching neutral, their policy rate should do the same. The real question is: How quickly does this happen?”
The Marriner S. Eccles Federal Reserve Building during a renovation in Washington, DC, USA, on Tuesday, October 24, 2023.
Valerie Plesch| Bloomberg | Getty Images
Ahead of Wednesday’s Fed meeting, Zief said market participants should prepare for mild disappointment given the lack of clarity about the pace and extent of further interest rate changes.
“Our base case is actually that the Fed won’t say too much. The dots probably don’t move too much. “The statement probably won’t change too much,” he added.
The Fed’s upcoming interest rate decision comes shortly after U.S. job creation showed little sign of slowing in November. Nonfarm payrolls rose a seasonally adjusted 199,000 this month, beating expectations of 190,000, while the unemployment rate fell to 3.7%, compared with the forecast of 3.9%.
Economists said at the time that the economic data appeared to reflect a labor market that remained resilient after a year in which it dodged recession fears.
What about the ECB?
Major banks in other countries are expected to follow in the Fed’s footsteps with their final monetary policy statements on Thursday.
Investors will be watching the ECB meeting closely to see whether the central bank is ready to implement rapid interest rate cuts in 2024. Inflation in the euro zone, which topped 10% last year, was 2.4% in November, reflecting its lowest level in more than 2 years.
Price growth has fallen rapidly toward the ECB’s 2% target in recent months, fueling investors’ bets on interest rate cuts early next year.
Christine Lagarde, President of the European Central Bank (ECB), at a press conference on the interest rate decision on Thursday, September 14, 2023, in Frankfurt. The ECB raised interest rates again, curbing inflation in the increasingly weak eurozone economy for the tenth time in a row.
Bloomberg | Bloomberg | Getty Images
But policymakers have warned investors that the “last mile” of tackling inflation could be the hardest – and could take twice as long as the fight to get inflation back below 3%.
Economists at Deutsche Bank said in a research note earlier this month that it was again bringing forward the timing of the first ECB interest rate cut to April, citing the latest inflation data and the tone of official comments. It added that there was also a “significant risk” of a rate cut as early as March.
“We fear that we have been too timid,” Deutsche Bank economists said on December 6. “The risk now is earlier and larger cuts and an ECB that is more able to decouple from the Fed.”
Economists at Pantheon Macroeconomics said that while the consensus now expects the ECB’s first rate cut in June next year, “we still think March is a good bet.”
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