The Fed, BoE and ECB Expected to Hold Rates

December 13, 2023 11:24

Without a doubt, two of the key themes this year have been inflation and interest rates. As 2023 draws to a close, a slew of important data regarding these two themes comes at us thick and fast.

Yesterday, the Bureau of Economic Analysis (BEA) in the US released inflation data for November (more on that later). Rounding out the rest of the week, the Federal Reserve is due to announce its latest interest rate decision at 19:00 GMT. This will be followed by decisions from the Bank of England (BoE) and the European Central Bank (ECB) on Thursday.

Three interest rate decisions in two days, with all three expected to be the same: hold.

At this stage, it is widely anticipated that we have reached the end of the steepest rate hiking cycle in decades and attention now shifts for clues as to when rates will start being cut.

We have heard the phrase “higher for longer” many times over the last year. Whilst we may have an answer to the question how much higher, the question now being asked is: how much longer?

As inflation falls and high borrowing costs weigh on economic growth, all three institutions are forecast to begin cutting rates next year. However, all three remain rightfully cautious.

The Federal Reserve

Yesterday’s data revealed that CPI in the US had cooled slightly year on year as, falling from 3.2% to 3.1%.

However, the Fed’s preferred bellwether for inflation, core CPI, which strips out volatile energy and food prices, remained flat year on year at 4%, and increased by 0.1% on a monthly basis. All these figures were in line with expectations.

Whilst headline inflation moved in the right direction, persistently sticky core inflation gives the Fed a reason not to act impatiently when it comes to loosening monetary policy. Today, the Fed is widely expected to vote to hold interest rates at their current range of 5.25% – 5.50% for the third time running.

Since any other outcome seems wildly unlikely, instead of the interest rate decision itself, eyes will be firmly focused on the Fed’s forecast for the economy and for an indication as to when rates will be cut and by how much. Currently, the futures market is predicting four cuts of 0.25% in 2024.

However, many onlookers are sceptical, with Barclays and Goldman Sachs among those who anticipate just two of these cuts to materialise. Indeed, with Fed Chair Jerome Powell recently saying that it was “premature…to speculate on when policy might ease”, it is likely that the Fed will attempt to pour further cold water on such assumptions.

As the markets anticipate a dovish pivot from the Fed, the US stock market has been on a tear recently, with the S&P 500 gaining more than 10% since the start of November, closing yesterday’s session 3% below its all-time high. With stocks moving one way, the US dollar moves the other. Since the beginning of November, the US Dollar Index has dropped 2.8%.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Roberto Rivero
Roberto Rivero Financial Writer, Admirals, London

Roberto spent 11 years designing trading and decision-making systems for traders and fund managers and a further 13 years at S&P, working with professional investors. He has a BSc in Economics and an MBA and has been an active investor since the mid-1990s