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MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance
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The Bank of Japan board is likely to raise the policy interest rate 25 basis points to 1.25% following its two day meeting that concludes on Friday as the economy moves in line with its baseline scenario and inflationary pressures persist.
The BOJ is expected to note financial conditions remain accommodative following the hike, signalling further increases ahead. While Governor Kazuo Ueda will highlight the Bank’s desire to focus on upside price risk, he is unlikely to clarify the terminal rate or comment on the expected hiking pace, noting the Board’s strategy will depend on the evolution of the economy and prices.
Market’s have fully priced in a hike on Friday, which would represent the Board’s third 25bp increase this year, and see the policy rate at 1.8% by June, its highest level since 1993. (See MNI BOJ WATCH: Ueda Points To Possible September Hike)
FLEXIBLE STANCE
The Bank is likely to move away from its previous approach of a hike every six months in favour of a flexible stance that moves the policy rate as needed based on the economy and prices. (See MNI POLICY: BOJ Sees Scope For Flexible Rate Hikes) Past hikes to 1% have had little impact on the economy and inflation to date, giving the Bank scope to act.
However, with the policy rate entering the lower bound of the Bank’s estimated neutral interest rate range of 1.1-2.5%, some board members are likely to support a cautious approach in line with Ueda’s strategy that has emphasised risk management.
Focus will also shift to the Board’s vote. Prime Minister Sanae Takaichi has installed two dovish board members, Toichiro Asada and Ayano Sato, who could vote against a hike. Markets would likely interpret that to mean Takaichi remains against tighter policy, despite U.S. pressure, which will lead to renewed yen weakness against the greenback.
The three internal Board members, including Ueda, see the need for a more neutral rate and financial conditions to prevent underlying inflation rising above the 2% target, while external members Takata Hajime and Masu Kazuyuki have also called for swifter normalisation.
COMPLICATED COMMUNICATIONS
Ueda’s post-decision communications will walk a balanced line to avoid stoking volatility in the yen and JGB markets. Overly hawkish language would put premature upward pressure on the terminal rate, while a dovish interpretation would lead to a yen and bond selloff – both highly undesirable outcomes.
Ueda’s comments are likely to focus on the outlook for the economy and prices framed within his risk-management approach. The BOJ will not relax its guard against inflation and it will seek opportunities to raise the policy rate unless corporate inflation views three to five years ahead peak and stabilise amid less accommodative or neutral financial conditions.
Bank officials are still concerned about the three factors highlighted in July that could still support prices, including AI-driven demand, oil prices and the yen. While corporate expectations have not accelerated, they are drifting higher, while the BOJ's composite index of inflation expectation results have also shown trend inflation and households’ expectations rising toward 2%, fuelling its concerns.
Sep-16 03:35
Rising energy demand and geopolitical disruptions across the Asia-Pacific are driving greater investment and diversification in the region’s energy sector, including renewables and potentially more trans-Pacific imports, the executive director of the Asia-Pacific Economic Cooperation (APEC) Secretariat told MNI.
The emergence of the U.S. as a potential source of additional energy supplies for Asia marks a recent shift among APEC members, said Eduardo Pedrosa, executive director of the APEC Secretariat.
“I think 10 or so years ago, there was no trans-Pacific energy trade,” Pedrosa told MNI on the sidelines of the APEC Energy Ministerial Meeting in Beijing. “Right now, there are increasing conversations to look for ways to bring that into Asia as well.” He noted growing discussion about the infrastructure needed to bring more U.S. energy across the Pacific.
Asia-Pacific economies nevertheless remain heavily reliant the Middle Eastern, he added, even as governments seek to diversify their supplies. Diversification was not only about securing different energy sources, but also about making energy infrastructure more resilient, he said, pointing to the Philippines’ efforts to protect its systems against natural disasters.
Recent oil supply volatility has so far been less severe than expected, Pedrosa added, suggesting that the expansion of renewable energy capacity, particularly in China, may have provided economies with an additional buffer.
“It’s surprising that it hasn’t been worse, to be frank,” he said. “We haven’t been impacted as badly as we might have been.”
Pedrosa expects the expansion of renewable energy and green technologies to continue even if energy prices fall, with the artificial-intelligence boom adding a new source of demand for reliable electricity alongside governments’ sustainability goals.
“Even though energy prices are high, and that might increase incentives to look elsewhere, this will just continue,” he said.
At the APEC Energy Ministerial Meeting in Beijing last week, the APEC Non-Binding Guidelines for Promoting Energy Security Coordination laid out plans to promote diversification of energy sources and import origins.
“APEC should expand energy supply, trade and import channels; deepen cooperation in areas such as natural resource development, electrification, power-grid modernisation and logistics network development; and use diversified supply to provide a greater ‘buffer’ for regional energy security,” Wang Jianbo, deputy director of the National Energy Administration, told reporters at the event’s press conference.
SUPPLY CHAIN
Pedrosa said the Covid pandemic and more recent geopolitical disruptions had exposed the risks of supply chains designed primarily around maximizing efficiency and minimizing inventories.
“It used to be that these supply-chain guys would always talk about how everything has to be ‘just in time,’” Pedrosa said. “Now, it’s more a case of ‘just in case.’”
Greater redundancy, however, comes at a cost, particularly for consumers, he added. “Companies will have to absorb some of it, and consumers will have to absorb some of it.” But he warned that the push for greater economic security should not come at the expense of open trade.
Asia-Pacific manufacturing networks depend on components moving repeatedly across borders before final assembly, meaning higher tariffs can increase costs as goods pass through regional production chains.
“The most important thing is that we still need that open trade,” Pedrosa said.
Sep-16 03:25
The gap between market pricing for rate hikes and policymakers' own expectations risks communication challenges, former Bank of England Monetary Policy Committee member Kristin Forbes told MNI, adding that the best approach for the Bank would be to clarify its reaction function and its reading of the economy.
The Bank’s decision and commentary on Thursday will come as the OIS curve implies over 100 basis points of tightening by July 2027, well above what market participants told the Bank in its last MaPS survey of rates expectations, even as oil prices have tracked a path resembling that assumed in the adverse scenario in July’s Monetary Policy Report.
The uncertainty posed by global shocks means central banks should give simpler guidance, Forbes, now an MIT professor, said in emailed replies to questions.
"Even if global shocks make it more difficult to forecast exactly how the economy will evolve, they have the tools to respond as needed to fulfil their mandates," she noted. (See MNI INTERVIEW: BOE Central Scenario Should Stress Uncertainty)
"This can include an assessment of current economic conditions and what data they are monitoring to make this assessment so that people understand the reaction function."
"I'd suggest going back to basics and keeping it simple," she said, adding "I thought Christine Lagarde phrased it well at Sintra, that they did not give 'forward guidance' but did give 'framework guidance'."
DISCREPANCY
Previous BOE research has highlighted that OIS pricing includes a wedge reflecting risk or term premia. However, even Chief Economist Huw Pill, who has consistently voted for a higher path for Bank rate than the committee at large, has said we might see only "modest tightening." (See MNI INTERVIEW: BOE Needs MPC Central Forecast In July - Aikman)
Analysts agree that the MPC will leave the policy rate on hold at 3.75% on Thursday, though recent market pricing suggests up to a 30% chance of a hike. The vote is expected to repeat the previous meeting's outcome, with six members including Governor Andrew Bailey opting to keep the rate unchanged as three favour a hike. A hike is fully priced in by November, with an increasing number of analysts expecting a rate increase that month.
During her term on the MPC, Forbes said that she took any discrepancy between market pricing and the BOE's forecast "as a reason to dig into what was driving the difference--and push myself to think about where the difference was and how confident I was in my assumptions. It was an opportunity to reassess my own forecast and probability weights versus what markets were signalling."
But, she added, "I’m not sure that the answer is that the BOE should necessarily follow the market, or convert the market to its own view, but it is a good opportunity to clarify where the differences arise and then let investors decide if they agree (or not)."
These discrepancies can arise for several reasons, she added, including different assessments of the risks around the forecast "which may not be captured in a baseline forecast," or "different assessments of how monetary policy will respond to different outcomes."
RISING EXTERNAL SHOCKS
"As for whether central banks can credibly signal their next move--I’ve been arguing for an extended period that in an era of geopolitical instability--central banks need to maintain flexibility and be very cautious about using forward guidance." (See MNI INTERVIEW: BOE Very Near Stable Reserve Level - Fisher)
In a recent paper, she argued that global shocks now account for about half of the variation in interest rates, more than double their role in the decades before the pandemic, and differ structurally from other shocks through greater effects on supply, higher volatility, and more persistent inflation effects.
Such shocks "are often hard to predict, come from non-economic events, and generate difficult trade-offs for policy. In a world with more 'shocks from heaven', central banks need to be nimble," she said, adding that this is discussed in her new book "The Art of Monetary Policy."
Sep-15 15:30
The European Central Bank is likely to wait until December before increasing interest rates again, given the absence so far of second-round effects from the energy shock, Eurosystem sources told MNI, though they noted that the ECB remains data-dependent and that discussion of a hike is also to be expected at the next meeting in October.
“We are not there yet. There is still benefit in waiting for December -- it is a supply shock, we can't lower energy prices,” one national central bank official said. “We have to be attentive to expectations, wages, second-round effects, but until these materialise we have time.”
December will also see a fresh round of inflation and growth projections, officials noted. The ECB’s two hikes in this cycle, in June and September, were both accompanied by quarterly projection rounds. (See MNI ECB WATCH: ECB Hikes By 25BP, Stresses Inflation Risks)
“October: not a chance,” another said, adding that even hawkish Governing Council members will want to see more data before moving the Deposit Rate from its current 2.5% into restrictive territory. “However, given what we have now, I'd say a December hike is a certainty without a formal agreement in the Gulf and energy prices retreating somewhat.”
Nonetheless, the ECB’s data-dependant, meeting-by-meeting approach means that the chance of an October hike cannot be entirely discounted.
“I think we will be more likely to hike in December, if it is needed. However, like July, there will no doubt be more noise from some,” another national central bank official said. “However, let's consider the data we will see between now and October.”
BLS
While there will only be one more eurozone inflation update before the next monetary policy meeting, the Bank Lending Survey will provide key insight into the strength of the economy, the official said, noting that lending criteria already looked restrictive in the July reading. The survey on the access to finance of enterprises will also be available before the meeting begins on Oct 28.
So far, officials have been pleasantly surprised by a more-resilient-than-expected eurozone economy, though this “was with the benefit of more benign energy pricing than we feared,” the official said, adding “We have to see how consumer confidence and corporate sentiment has held up through the surge in prices since late August.”
The December projections will also look ahead to 2029 for the first time, another official noted.
“More tightening, hikes, may be needed to dampen spillover from higher wages. The case is certainly gathering momentum,” the official said, though he added that “Past policy actions have given us scope to tighten gradually and without rushing.”
However, one of the sources was less convinced of the need to see the projections to move on rates, and suspected that other Governing Council members would be of a similar view.
“The idea is that now moving between projections is on the table. We have been using projections to give us more time to be sure it was the correct decision. Now we may not need that,” the official said. “This doesn't mean we will move in October. I still need to see more. More signs that inflation is entrenched.”
An ECB spokesperson declined to comment.
Sep-15 14:33
The Federal Reserve is expected to raise the federal funds rate by a quarter point at the conclusion of its meeting this week, but the odds of that are closer to even than all-but-certain, and projections for additional tightening will be limited, former Fed officials and staffers told MNI.
The Fed's Summary of Economic Projections will likely show sticky inflation and a slower path to the 2% target. The dot plot is expected to show a median of two rate hikes in 2026, they said, and potentially another hike next year.
William English, former director of the division of monetary affairs at the Fed Board, said a rate increase this week is not a slam-dunk. "50/50 or a bit more than 50/50 seems right," he said in an interview.
"The key question to which nobody knows the answer is: will there be a deal to settle the war? One bad scenario is you raise rates now and in December, and then there's a settlement, and inflation comes down, and you end up with a policy that's too tight, and you have to cut rates next year to avoid slowing the economy too much," said English, now at Yale University.
"Even if you see tighter policy as desirable in your baseline scenario, you may still worry that you could overdo it in a fairly likely scenario where there's some sort of settlement in the Middle East and inflation comes down quickly."
Some predict the central bank keeping rates on hold this week. Peter Ireland, a former Richmond Fed economist, sees a patient FOMC even as dots drift higher in the SEP. "I understand where that market consensus is coming from, but still expect an outcome that repeats the one from last time, in late July, with rates held steady but several dissenting votes in favor of higher rates."
WARSH REACTION FUNCTION
That Chair Kevin Warsh's reaction function is unknown also adds uncertainty.
Futures market pricing of 90% probability of a hike this week is only appropriate if you ignore Warsh, said former Fed staffer Eric Swanson, economist at University of California, Irvine. "The inflation fundamentals do justify a rate increase, and the majority of the FOMC would be very likely to vote for one if not for the influence of the Fed chair. The problem is, nobody knows where the chairman really stands."
The consumer price index continued to climb last month, bringing the annual inflation rate to 3.4% in August. Higher oil and gas prices were a significant factor, the government data showed. Core CPI at 2.4% was the lowest since March of 2021.
By some accounts, markets are boxing the Fed into a rate hike, said former Fed economist Steve Kamin, who sees an increase this week as very likely. "To the extent that markets may worry about a pliable Fed that accommodates future fiscal deficits, a hold at this meeting would damage Warsh's already at-risk credibility and further boost long-term yields."
HIGHER DOTS
The ex-officials and staffers expect this week's new projections to show more limited increases than the nearly 100 basis points of hikes which markets price in through June.
Former Atlanta Fed President Dennis Lockhart said the 2026 median could show the policy rate 50 basis points higher by year-end, right in the center of a fairly mixed group. Another hike early next year is likely the peak of the cycle unless inflation progress deteriorates at year-end, former senior Fed adviser Kurt Lewis told MNI. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis)
Swanson also sees two hikes this year. "One at this meeting and one more before the end of the year," he said over email. "Then one more in the first quarter of 2027. Inflation is still significantly above the FOMC’s 2% target and is not trending back toward the target."
Although inflation has been persistent, it looks to former Fed Board staffer Joseph Gagnon like a string of different positive shocks and not a generalized rise in underlying inflation.
He sees a hike this week as less of a sure thing. "My odds are lower than that, perhaps 50-60%. I do think a 25bp hike is the right move to show the Fed is not constrained by Trump. But I would put only 25-50bp more into the dot plot," Gagnon said. "I don’t think the Fed is far behind the curve."
In June, eight officials wrote down steady rates for the remainder of the year, while five officials projected two hikes and three wanted one hike. On the extremes were one official who wrote down three hikes and another who saw a cut by year-end.
Sep-15 11:18
Austria’s Bundesschatz retail bonds will provide some protection against the impact from rising yields on the country’s borrowing, a spokesman for the Austrian debt office told MNI, adding that demand for Austrian debt indicates its safe haven status.
The yield on the 10-year RAGB was 3.75% on Tuesday morning, the highest since 2011, as the Middle East conflict pushed energy prices higher.
"While higher yields and volatility warrant attention, EGB markets have so far continued to function in an orderly manner according to our regular contacts with EGB traders at our primary dealer banks," the OeBFA said.
"Careful timing, appropriate pricing and a diversified investor base will remain of utmost importance also in 2027. In this regard, our retail instrument Bundesschatz -- which is very well received by investors especially in the higher yield environment -- helps to become a bit more independent from market funding," it said.
"The exact volume will depend on the demand both from retail investors as well as from [eligible] public sector entities ... further details regarding next years’ funding outlook will be published in December."
Demand has remained strong this year, it added, which "clearly underlines the safe haven status of our credit."
"In the case of Austria we have seen this year very high demand both on the primary as well as on the secondary market together with the 10-year RAGB reaching its tightest spread to German Bunds since nearly six years at last weeks’ auction," it said.
"We believe there remains sufficient investor capacity to absorb upcoming issuance of Austrian government paper," adding that the fact that 80% of the funding target has been met provides "flexibility regarding timing, instruments and maturities." (See MNI INTERVIEW: DZ Bank New Primary Dealer For Austrian Paper)
“The absolute yield level is not, by itself, an indicator of impaired market functioning," the spokesman said, adding that the agency does not "target specific yield thresholds." (See MNI INTERVIEW: Problem If Belgian 30-Year Hits 4.5%-Debt Chief)
Sep-15 10:53
(Repeats story to additional subscribers)
Markets widely expect the Federal Reserve to raise interest rates this week and signal additional hikes to come, but the lack of a clear reaction function from Chairman Kevin Warsh has added risks around the outcome of the September FOMC meeting.
The August CPI report Friday was firm enough to convince officials that tighter monetary policy is needed in light of persistent price pressures. Core CPI climbed a stronger-than-expected 0.29%, which translates roughly to a 2.7-2.8% core PCE rate on a three-month annualized basis, with the 12-month figure continuing to run well above 3%, according to analyst projections.
The August jobs report also surprised on the stronger side, underscoring that elevated inflation remains the Fed's focus.
Traders are pricing in a more than 90% probability of a hike Wednesday and 93 bps of tightening through June. (See MNI INTERVIEW: Clock Is Ticking On Fed To Hike - Lockhart)
The chairman has emphasized the importance of market signals, in addition to acknowledging that he would be "hard pressed" to say financial conditions are currently restrictive.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said at the Kansas City Fed symposium in Jackson Hole.
The Fed needs to act to maintain its inflation-fighting credibility in light of the new data, former officials told MNI. (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It- Evans)
"For credibility's sake alone they've got to make a move," former Philadelphia Fed President Patrick Harker said. (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
Yet former Fed officials and staffers say Warsh also likely has the votes for staying on hold, should he wish to make that argument. (See MNI INTERVIEW: Risks To Fed Independence Growing)
A core group of FOMC members still prefers to wait and see how inflation plays out in the second half of this year, not wanting to weaken the economy unnecessarily. (See MNI POLICY: Fed Hike In Doubt, Despite Pressure To Deliver)
SHALLOW CYCLE
A fresh set of projections this week is likely to show a second hike before year-end and potentially one more next year, ex-Fed officials and staffers said. (See MNI INTERVIEW:Fed To Hike Once Or Twice, Timing Unclear-Chabot)
If inflation continues to moderate, the Fed may pause there. However, should price pressures worsen at year-end, the Fed may keep hiking at a measured pace, former senior Fed adviser Kurt Lewis told MNI. (See MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis)
Warsh won't explicitly guide expectations for the path forward, and much will be dependent on the energy crisis and trade policy.
Sep-15 08:05Markets widely expect the Federal Reserve to raise interest rates this week and signal additional hikes to come, but the lack of a clear reaction function from Chairman Kevin Warsh has added risks around the outcome of the September FOMC meeting.
The August CPI report Friday was firm enough to convince officials that tighter monetary policy is needed in light of persistent price pressures. Core CPI climbed a stronger-than-expected 0.29%, which translates roughly to a 2.7-2.8% core PCE rate on a three-month annualized basis, with the 12-month figure continuing to run well above 3%, according to analyst projections.
The August jobs report also surprised on the stronger side, underscoring that elevated inflation remains the Fed's focus.
Traders are pricing in a more than 90% probability of a hike Wednesday and 93 bps of tightening through June. (See MNI INTERVIEW: Clock Is Ticking On Fed To Hike - Lockhart)
The chairman has emphasized the importance of market signals, in addition to acknowledging that he would be "hard pressed" to say financial conditions are currently restrictive.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said at the Kansas City Fed symposium in Jackson Hole.
The Fed needs to act to maintain its inflation-fighting credibility in light of the new data, former officials told MNI. (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It- Evans)
"For credibility's sake alone they've got to make a move," former Philadelphia Fed President Patrick Harker said. (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
Yet former Fed officials and staffers say Warsh also likely has the votes for staying on hold, should he wish to make that argument. (See MNI INTERVIEW: Risks To Fed Independence Growing)
A core group of FOMC members still prefers to wait and see how inflation plays out in the second half of this year, not wanting to weaken the economy unnecessarily. (See MNI POLICY: Fed Hike In Doubt, Despite Pressure To Deliver)
SHALLOW CYCLE
A fresh set of projections this week is likely to show a second hike before year-end and potentially one more next year, ex-Fed officials and staffers said. (See MNI INTERVIEW:Fed To Hike Once Or Twice, Timing Unclear-Chabot)
If inflation continues to moderate, the Fed may pause there. However, should price pressures worsen at year-end, the Fed may keep hiking at a measured pace, former senior Fed adviser Kurt Lewis told MNI. (See MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis)
Warsh won't explicitly guide expectations for the path forward, and much will be dependent on the energy crisis and trade policy.
Sep-15 00:36
The Federal Reserve will likely take benchmark interest rates 75 basis point higher over the coming months before pausing, but don't expect Chairman Kevin Warsh to explicitly manage market expectations for how steep the path will be this week, former senior Fed adviser Kurt Lewis told MNI.
Lewis, who changed his own September FOMC call to a hike after the August CPI report nudged the case over the threshold, said he expects the committee to raise rates three times as long as inflation continues moderating slowly, with tariff effects fading and second-round effects from the oil shock absent.
But should inflation get worse in the fourth quarter, the committee is likely to continue to march rates higher, he said, noting core PCE inflation is on track to finish the year at 3.0-3.1% for a third consecutive year.
"If they're seeing a moderating trend, it's just not happening very quickly, then I think they go up 75, wait there for a while and settle down," he said.
"If we get into the new year, especially if Q4 inflation just keeps getting worse, and we end the year meaningfully above 3%, then I think they would keep going in these 25 basis point increments. Not very quickly, but there would definitely be much more than 75 basis points." (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
OCTOBER DECISION
The likely hike this week reflects a continuation of pressures that have been building since June, said Lewis, now head of central bank policy at Piper Sandler.
"The thing that's a little underappreciated is they have been close to this threshold for a while," he said. Officials including Governor Chris Waller have said they're comfortable staying on hold only as long as things continued to get better. "Things had to continue to go right, and they didn't by just barely enough."
Chairman Kevin Warsh has also leaned into the market's being an important indicator, Lewis said, and traders are currently pricing in over 90% probability of a hike this week and 92 bps of increases through June 2027.
The FOMC is likely to act again in October, in spite of the proximity of midterm elections, if the September inflation reports appear to be worse than expected, Lewis said. "The election piece of this is just not as big a deal in the room as it is to everybody else."
Asked whether Warsh would opt for a larger half-point move this week to reassert credibility, Lewis said the votes might be there if Warsh wanted it but that path looks unlikely. A larger increase would raise questions about the committee's near-term intentions that Warsh would struggle to answer without committing to more explicit guidance than he's willing to give, he said.
"It opens up the uncertainty aperture wider, right? And he's not in the business of over-communicating about the policy trajectory. So to the extent that you surprise people to the upside, you risk telling them we're more worried than you thought, things really are different now than they were a month ago, and whether we are going to go 100 basis points or more is now on the table." (See MNI INTERVIEW: Clock Is Ticking On Fed To Hike - Lockhart)
INDIRECT GUIDANCE
Warsh is similarly unlikely to offer explicit forward guidance about the pace of hikes, since doing so would cut against his own stated preference to let markets read the data cleanly, Lewis said.
Instead, any indication of caution will show up only indirectly, perhaps through a description of some underlying inflation indicators as having performed better in August, he said. More likely, Warsh sticks to describing the SEP projections at a high level and telling reporters to ignore the dots as any promise of future action.
August inflation data have strengthened the case for rate hike at this week's FOMC meeting and another before year-end, former Atlanta Fed President Dennis Lockhart told MNI, arguing that the hypothesis that price pressures from tariffs and the Iran war are fading in the second half of the year is looking less valid.
"The data are in. The narrative has not changed: elevated and persistent inflation that's gone on for a long time, with a solid and stable employment picture. The narrative continues to be missing the inflation objective by a substantial amount," he said in an interview.
"So the clock is ticking, and it calls for action. I would hope that they will take action at this meeting, and I actually think they'll do damage if they choose not to."
Core CPI rose a firmer-than-expected 0.29% in August. The data translate roughly into a 2.7-2.8% core PCE rate on a three-month annualized basis, with the 12-month figure continuing to run well above 3%, according to analyst projections.
Moreover, the supply-side forces underpinning the Fed's wait-and-see posture have shifted since earlier this year, he said. Oil prices have climbed above USD100 a barrel amid renewed friction in the Strait of Hormuz, and new 50% tariffs on a range of Canadian goods have added to cost pressures. (See MNI INTERVIEW: Harker Says Fed Hike Likely This Week)
FED CREDIBILITY
Even a larger 50-basis-point move cannot be ruled out, Lockhart said.
Strong action would lend credibility to Chairman Kevin Warsh's inflation-fighting rhetoric and, importantly, allow the committee to skip action at its October meeting -- consistent with a longstanding informal practice of avoiding major policy shifts close to elections.
"It buys time. And they may say, 'If we're going to hike, maybe we just frontload it,'" he said.
A hold this week could damage the Fed's credibility, given how strongly markets have priced in a hike following Warsh's public commitment to restoring price stability at Jackson Hole, he said.
"The Texas phrase 'all hat, no cattle' is making its rounds among people in the market every day," Lockhart said. "Decisions by the committee truly are apolitical, data-dependent and data-driven. But I don't think the credibility argument is irrelevant here." (See MNI INTERVIEW: Fed To Hike Once Or Twice, Timing Unclear-Chabot)
DOTS RISING
The median rate projection this week could show the policy rate 50 basis points higher by year-end, right in the center of a fairly mixed group, Lockhart said.
"The committee knows that one 25-basis-point hike isn't going to accomplish much. Among some of the hawks there will probably be projections for a 75-basis-point increase by year-end, and there will be some who will project a hold through year-end," he said.
"And you can have some inconsistency between the decision made in the meeting and the SEP projections that come in the week before. The 'hold' doves may not readjust their dot at the meeting, if the consensus is to hike."
Interestingly, Warsh's decision not to submit his own dots could prompt some officials to treat their projections less as forecasts than as signals, Lockhart said.
A policymaker on the fence between 50 and 75bp higher rates this year might put in 75 to send a message, he said.
"The chair's decision not to participate reduces the seriousness of the exercise. And with it being less serious, I would not be totally surprised if one or two members decide that they're going to put in a projection -- which they know they can revise at the end of the year anyway -- that has message content."
Sep-14 13:55About
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