U.S. GDP and Inflation Signal Rate Cuts… Focus on Powell’s Crucial Words

global monetary policy may be at a turning point

As major central banks, including those of the U.S., Japan, and the UK, hold key interest rate decision meetings this week, global monetary policy may be at a turning point. With all eyes on the Federal Reserve's upcoming decisions and Chairman Jerome Powell's statements, markets are on edge, anticipating potential rate cuts. This blog delves into the current economic indicators and the significant decisions expected from central banks worldwide.

This week, the spotlight is on the Federal Reserve as it prepares for a crucial meeting on July 31st, where Chairman Jerome Powell's press conference is expected to be pivotal. Market speculation is rife, with many betting on a rate cut in September, but Powell's signals will be crucial in determining market movements.

Japan's central bank is also set to discuss interest rate hikes on the same day, while the Bank of England will hold its monetary policy meeting on August 1st. Emerging markets, including Brazil, Chile, Colombia, and Pakistan, are also scheduled to convene for their monetary policy decisions. This week could mark a significant pivot point in global interest rates.

According to the CME FedWatch Tool, as of July 27th, there is a 93.8% chance that the Federal Reserve will keep rates steady at 5.25-5.5% during the upcoming FOMC meeting. However, the probability of a rate cut in September stands at 100%.

The market expects the December rate to be reduced by 0.25% in three separate cuts, with a 56.9% chance of this occurring, while a two-cut scenario has a 33.8% likelihood. Recent U.S. economic indicators, such as the Consumer Price Index (CPI), GDP growth rate, and the Personal Consumption Expenditures (PCE) price index for June, have supported expectations for rate cuts. The PCE index rose by 2.5% year-over-year and 0.1% month-over-month, aligning with market expectations and bolstering hopes for a rate cut.

The PCE price index, which measures the prices paid by U.S. residents for goods and services, is a key inflation indicator for the Fed. Despite the annual PCE index slightly exceeding market forecasts, it remains supportive of rate cut expectations.

The market's focus is now on Powell's statements at the upcoming FOMC. Analysts believe he may signal potential rate cuts in September. Olu Sonola, head of U.S. economics at Fitch Ratings, suggested that the Fed is likely to set the stage for a rate cut by monitoring labor market conditions during this week's meeting, as reported by Reuters.

Bloomberg highlighted that the July employment report, released just before the FOMC meeting, will be a critical factor in the Fed's decision-making process. Additionally, the U.S. Treasury's quarterly refunding announcement (QRA) on July 29th will be closely watched for any changes in the issuance size of the third-quarter bonds, initially set at $847 billion.

The upcoming U.S. presidential election adds uncertainty to the Fed's decision-making, with some predicting that multiple rate cuts might be challenging to implement in this political climate.

In the UK, the Bank of England faces a similar predicament. With a general election on the horizon, the BOE may consider cutting rates for the first time in four years at its August 1st meeting. Dan Hanson, an analyst at Bloomberg Intelligence, expects a 0.25% rate cut. The BOE has raised rates 14 times consecutively, bringing the current rate to a 16-year high of 5.25%.

However, the Wall Street Journal notes that the ongoing rise in wages and service prices could lead to a split opinion within the BOE. The European Central Bank (ECB), which already cut rates in June, is now focused on the July inflation and second-quarter Eurozone GDP figures, which could influence a potential rate cut in September.

Japan's central bank, which ended its negative interest rate policy in March after eight years, is also under pressure to hike rates due to persistent inflation. BOJ Governor Kazuo Ueda indicated the possibility of a rate hike during a recent parliamentary session. Nevertheless, the Wall Street Journal suggests that the recent yen appreciation could lead the BOJ to hold off on a rate hike.

The yen's recent strength, partly driven by intervention and rate hike expectations, has seen it climb from a 38-year low of 161.79 yen per dollar on July 11th to as high as 151.94 yen on July 25th. If the yen continues to strengthen and the BOJ raises rates, the resultant capital outflow from yen carry trades could increase volatility in global stock and bond markets.

As major central banks convene this week, global monetary policy may be at a crucial juncture. The Federal Reserve's decisions and Jerome Powell's statements will be particularly influential, potentially triggering significant market movements. With the possibility of rate cuts on the horizon, investors and analysts alike are closely monitoring the developments, anticipating the next steps in this dynamic economic landscape.