How far will the Federal Reserve go in its next rate hike?

Will the Fed propose a third increase of 0.75 percentage points?

The U.S. Federal Reserve is expected to announce a third consecutive 0.75 percentage point interest rate hike after its September policy meeting, which ends on Wednesday.

Over the past few months, the Fed has been raising interest rates at a brisk pace in an effort to rein in price growth that continues to hit near 40-year highs. Economists had expected consumer prices to fall in August from July due to lower gasoline prices, but data released last Tuesday showed a slight increase, suggesting the Fed still has some room for improvement. work to do.

Following the inflation data, investors began betting on the possibility of a full one percentage point hike, although the odds of that remain low given the Fed’s consistent messaging in recent weeks regarding a move of 0.75 percentage points.

On Wednesday, the Fed will also release its “dot plot,” or summary of economic projections, which shows where the median Fed official thinks interest rates, inflation, unemployment and gross domestic product will lie over the course of the year. of the next few years. Significant changes in expectations are expected.

The latest dot chart was released in June and suggested inflation, measured as basic personal consumption expenditure, would be 4.3% by the end of 2022 and 2.7% by the end of 2023. The base PCE for July was 4.6%.

The June dots suggested that interest rates would be 3.4% by the end of 2022 and 3.8% by the end of 2023. At present, the futures market is expects rates to reach 4.2% by the end of the year, peak in March 2023 at 4.5% and drop to 4% by the end of 2023. Kate Duguid

Will the BoJ stick to its ultra-lax policy?

The Bank of Japan is expected to maintain its ultra-loose monetary policy as market participants wonder whether the authorities will intervene directly to stem the yen’s slide to a new 24-year low.

The policy meeting follows a tense week in which BoJ officials telephoned traders to inquire about market conditions during a so-called rate check, illustrating the government’s sense of alarm over to the sharp fall of the yen against the US dollar. In the past, these audits preceded an intervention by the Ministry of Finance to control the exchange rate.

However, the pressure on the yen is unlikely to affect the BoJ’s monetary policy, with its governor Haruhiko Kuroda repeatedly saying that it must maintain its position until wages and inflation increase “in a way stable and consistent.

Most economists expect Kuroda to stay the course until his term expires in April next year. The only expected change is for the BoJ to confirm the end of a program it set up to offer cheap loans to banks financing small and medium-sized businesses during the Covid-19 crisis.

“We expect the BoJ to keep monetary policy unchanged . . . having maintained its stance that monetary policy is not forex-targeted amid a sharp depreciation of the yen against the dollar,” he said. said Citigroup Japan economist Kiichi Murashima.

The Fed, Bank of England and Swiss National Bank are expected to hike rates this week, widening a divergence in global yields that has pushed the Japanese currency lower. Kana Inagaki

Will the BoE raise rates for the seventh consecutive time?

The BoE is expected to continue tightening its policy at the next meeting on Thursday as it deals with inflation rates about five times higher than its 2% target.

The central bank has raised rates for the past six consecutive meetings and picked up the pace in August with a 0.5 percentage point hike. Economists’ median forecast in a Reuters poll is for another half-percentage point hike, although some expect an extra-large 0.75 percentage point increase in the bank rate.

The annual pace of inflation in the UK fell to 9.9% in August, from 10.1% the previous month, but core inflation, which excludes food and energy, rose by 0.1 percentage point to reach 6.3%.

“The accelerating core alongside the continued level of services inflation remains a notable cause for concern – a cause which we believe is likely to reaffirm the need for further ‘vigorous’ action on the part of the [Monetary Policy Committee]said Benjamin Nabarro, an economist at Citi.

Some economists also say the energy support package launched earlier in the month and tax cuts expected to be announced with the budget will help limit the hit from soaring gasoline prices for businesses and consumers, but they could also mean higher interest rates for longer.

Prime Minister Liz Truss’ intervention in the energy market – especially if combined with deep tax cuts – could keep spending growth too high, said Kallum Pickering, an economist at the Berenberg investment bank. “While such fiscal interventions will ease the short-term pain for consumers and reduce the peak rate of inflation, they do tip the risks to our medium-term inflation calls to the upside,” he said. added. Valentina Romei

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