LAWRIE WILLIAMS: FOMC , BoE and beyond
The latest notifications of interest rate increases have been announced by the U.S. Federal Reserve after Tuesday and Wednesday’s FOMC meeting and Thursday’s Bank of England meeting respectively and there were no real surprises. The U.S. Fed hiked rates by the much anticipated 75 basis points for an unprecedented third meeting in a row and the Bank of England put UK rates up a marginally less aggressive 50 basis points a day later – all in the perhaps futile intention of bringing down seemingly ever-rising inflation. Meanwhile Russia’s President Putin still seems intent on intensifying his Ukrainian war effort, the ramifications of which have been one of the principal causes of the rising global inflation trends.
As we have noted before, the Chicago Mercantile Exchange (CME)’s Fedwatch Tool gives a snapshot view of what the U.S. markets are foreseeing on the likely path of U.S. interest rate impositions for the next few FOMC meetings and it is currently predicting more of the same medicine with around a 75% chance of another 75 basis point (3/4%) rate increase at the November FOMC meeting and a year-end interest rate of between 4.25 and 4.5% and warns that the U.S. is probably heading for recession. We believe it is already in one.
In the UK, the Bank of England also reckons the UK economy is also already in recession. Although in both the UK and the U.S. the recessions so far are relatively mild – but the longer the inflationary trend persists the deeper the inflationary pressures may become, and so far the likelihood looks to be that this period of inflation will be a prolonged one.
Following the FOMC rate decision, the initial market reaction was, as we had predicted to drive equity markets and bitcoin prices down sharply. Gold and silver did not immediately follow prices downwards as some had predicted despite a rise in the dollar indexes as many analysts had predicted, but initially gained a little ground, but have since fallen back quite sharply on Friday with the dollar gaining some considerable ground against alternative currencies – notably against the Euro and the Pound Sterling, although the Russian Ruble seems to be showing some considerable strength too. European equities. Like their North American counterparts, continued on a downwards path though as did bitcoin and ethereum after a period when it looked as though they might have been on the cusp of a mild recovery..
As we have warned continually we can only see a continuingly downwards path for equities and bitcoin while recessionary tendencies continue to reign. And these will likely continue for as long as inflation remains elevated and that will likely continue while the war in Ukraine persists and neither the Russians nor the Ukrainians seem to show any signs of a compromise which might bring it to a rapid close.
In the U.S. the Fed has so far given little or no indication of a willingness to change course until it has conquered inflation, although we think that perhaps its 2% target rate may be unachievable except perhaps in the ultra-long term, which could be several years yet. We suspect that it will eventually settle for perhaps a 3% target rate which may well be achievable by end 2023 or early 2024 and be somewhat easier to maintain. We do also expect the current positive employment data to become less so as recessionary influences bite, but an element of recovery from the Covid-induced economic contractions will help soften the blow and perhaps mitigate the overall downturn. What happens in the U.S. will be mirrored elsewhere, especially in Europe as countries manage to diversify away from Russian oil and gas supplies, but probably at an additional cost.