13 September 2024: MPC is set to follow the Fed

A former member of the Bank of England’s Monetary Policy Committee, told reporters yesterday that the Chancellor’s recent comments had been counterproductive, and had driven unnecessary feelings of fear and foreboding in the public.

Andrew Haldane was the Bank’s Chief Economist and a member of the MPC between June 2014 and June 2021.

Haldane, now the chief executive of the Royal Society of Arts, has said he hopes the chancellor will not announce an austerity budget in October. There are “concerns” about the measures she could take.

At some point, the Government will have to take responsibility for the running of the economy, and the constant blaming of former cabinet Members for the economic black hole, the poor state of public services and the issues facing the NHS will “wear thin” with voters.

With the economy having flatlined during both July and August and the data that has been published pointing towards a similar level of activity this month, it is possible that the country could slip into a recession as soon as the first or second quarter of next year.

Manufacturing output dropped sharply last month, an inauspicious start for the new government, which is committed to accelerating the pace of growth.

The Bank of England is expected to follow the lead of the Federal Reserve by cutting rates next week by twenty-five basis points and once more this year, probably in November.

Haldane’s concern that Rachel Reeves may introduce further austerity in her budget next month is shared by many market commentators.

Reeves and her colleagues are trying to encourage large inward investment in the country, like the commitment made by Amazon recently, which has pledged to invest around eight billion pounds over the next five years in building and maintaining data centres.

The investment project will add up to 14 billion pounds to the country’s gross domestic product by the end of 2028 while supporting more than 14,000 jobs at British businesses, according to the company. This is considered to be a major vote of confidence in the government.

The pound rallied strongly against the dollar yesterday as economic data in the U.S. pointed to a more lasting series of rate cuts by the Fed.

It climbed back to a high of 1.3127 and closed at 1.3124.

The International Monetary Fund published a report yesterday in which it concurred with the sentiments of several members of the FOMC, agreeing that interest rate cuts should begin at once in the U.S.

An IMF spokesperson told a regular news briefing that the IMF expected the U.S. economy to slow over the rest of the year and that this would be reflected in its updated World Economic Outlook forecasts in October.

Core Personal Consumption Expenditures are expected to fall to 2.5% by the end of this year and “bottom out” at 2% by the beginning of the second quarter.

This should allow the Fed to feel confident to begin cutting rates immediately.

The market is beginning to feel that the FOMC missed a golden opportunity to begin to cut rates in July. It will now give the impression that is becoming reactive by cutting rates next week as the economy begins to falter.

It has been felt for a considerable time that the economy was on the cusp of a soft landing, but unless Jerome Powell declares one next week, the chance may have been lost.

Following the Presidential Debate that took place earlier this week, the question of Central Bank Independence has risen again.

Former President Trump appointed Jerome Powell as Chair of the Federal Reserve but has been critical of its performance over the past year, believing that it should provide further support to the Administration.

Powell has jealously guarded the Fed’s independence, maintaining that its decision-making processes should remain outside political interference.

Meanwhile, Kamala Harris has agreed with the views of Treasury Secretary Janet Yellen, who incidentally was fired as the Chairperson of the Federal Reserve by Trump, who says a significant mutual partnership has developed Between the Treasury and Central Bank which benefits the economy as a whole.

Next week will mark the beginning of a new phase for the global economy, with the Fed cutting rates for the first time since the end of the Pandemic.

One more cut, most likely on the day after the election, has been pencilled in by the market, although most investors will want to hear what Powell has to say in his press conference next week before that decision is set in stone.

The dollar index ran into significant selling pressure as it approached resistance at 101.80. This has marked the top of its range over the past half a dozen sessions. It fell to a low of 101.22 and closed at 101.24.

The ECB continued the month of loosening monetary policy by G7 Central Banks that was started by the Bank of Canada last week by cutting its key interest rate by twenty-five basis points. It was the second rate cut that has been agreed by the Bank’s Governing Council this year.

This decision follows a widely expected 25 basis point reduction after the ECB’s first-rate cut in June, which marked its first such move in five years.

Alongside the rate cut, the ECB also revised its economic growth forecasts for the eurozone.

In her press conference following the announcement, ECB President Christine Lagarde, who has been conspicuous by her absence recently, spoke of the challenges that are facing the Eurozone as it endeavours to recover from a period of low growth and high inflation that caused interest rates to remain at their highest for two decades.

She believes that rising household incomes over the next four quarters will encourage further consumption that will accelerate the recovery.

The ECB now expects the eurozone economy to grow by 0.8% in 2024, 1.3% in 2025, and 1.5% in 2026.

These figures represent slight downgrades from the bank’s June projections, primarily due to weaker domestic demand expected in the coming quarters.

Inflation is projected to remain at 2.5% for the rest of this year, 2.2% in 2025 and 1.9% in 2026.

Eurostat recently lowered its forecast for GDP second-quarter growth from 0.3% to 0.2%, while Germany reported a drop of 2.4% in industrial production in July.

The ECB has not performed a pivot, like both the Fed and the Bank of England. Its focus is still solidly on inflation and according to Lagarde will continue to be data-driven when making monetary policy decisions.

The market expects the ECB to embark upon a programme of one rare cut per quarter, although Lagarde will want to guard against the Governing Council’s decisions becoming predictable.

The euro gained yesterday following the ECB’s decision. It rallied to a high of 1.1075 and closed at that level.

Have a great day!