Chair Powell says that a potential pullback in lending would indeed do some of the work of monetary policy

Markets

The contrast between the ECB at the Watcher conference and the Fed yesterday was striking. Delivering a 50 bps rate hike last week, it said then and again yesterday that there is still more ground to cover. The Fed hiked rates by 25 bps to 4.75-5%. Language about future tightening in the policy statement was softened from “ongoing increases in the target range” to “some additional policy firming”. The updated dot plot suggested one more 25 bps move this year but that would be the end of it. Growth forecasts were revised down for this year (0.4%) and the next (1.2%) while inflation was seen a bit higher at 3.3% in 2023 and at an unchanged 2.5% in the next. Unemployment is still expected at a low 4.5-4.6% across the horizon, suggesting ongoing faith in a (very) strong labour market. The recent banking turmoil and its effect on credit flows and thus consumption and demand is uncertain. But Chair Powell said that a potential pullback in lending would indeed do some of the work of monetary policy. He kept the other option of still-higher interest rates open in case of only a modest economic impact and given still-elevated inflation and the excellent shape of the labour market but the lack of conviction was palpable. Powell also downplayed chances for rate cuts already this year with the dot plot showing none. Markets came to a different conclusion though. After a one in two chance for a final hike in May, they expect economic activity to cool down so much that it would prompt the Fed into 75 bps of rate cuts in the second half of this year. US yields across the curve fell by 8 (30-y) to 25.9 bps (3-y). Losing this much of interest rate support, the dollar slid from EUR/USD 1.076 to 1.085. DXY fell from 103.19 to 102.34 and USD/JPY dropped from 132.51 to 131.44. US equities lost about 1.65% despite the sharp drop in US bond yields. The declines were partially inspired by comments from US Treasury Secretary Yellen (see headline below).

Asian-Pacific equity markets trade mixed this morning as they digest the Fed’s message yesterday. Hong Kong outperforms while Japan lags behind. The USD extends losses against all G10 peers and that probably won’t change for now. EUR/USD surpasses 1.09. Short-term US yields lose another 4 bps. German Bund yields are set to open lower. Focus today shifts to European soil. The economic calendar contains several central bank policy meetings by the Norges Bank (+25 bps expected), the Swiss National Bank (+50 bps expected) and the Bank of England. The latter was served an ugly inflation print yesterday. Prices unexpectedly accelerated again, de facto fulfilling the condition of “evidence of more persistent inflationary pressures”. This paves the way for a probably final 25 bps hike to 4.25%. The Bank of England has long been split in whether to tighten further or stand pat. After the Fed’s policy decision yesterday, the debate is now likely settled. That means more scope for EUR/GBP to run higher.

News and views

US Treasury Secretary Yellen yesterday pushed back against the recently floated idea of providing a blanket deposit insurance to stabilize the US financial system. “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits,” she said before a Senate subcommittee. Bloomberg earlier this week reported that the US Treasury is studying ways to temporarily raise the federal insurance cap above $250k if smaller lenders face difficulties. In her opening remarks, she stressed that shareholders and bondholders of failed banks are not being protected by the US government.

The Hungarian economic development ministry announced that it will extend a cap on large bank deposits – due to expire end of March – by three months. Under the cap, Hungarian commercial banks cannot pay an interest rate above the 3-month discount-bill yield for deposits of up to a year. To protect the economy, the economics ministry has also banned the unrestricted transfer of central bank discount bills.

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