Key events
Markets brace for Fed interest rate decision
Tension is mounting as the US Federal Reserve prepares for an extremely eagerly anticipated interest rate decision.
The Federal Open Market Committee will announce under in an hour’s time whether it has pressed on with its monetary tightening push by raising borrowing costs, or pressed pause on its rate hikes.
The Fed’s target interest rate is currently set to a range of 4.5 to 4.75 percent.
At 2pm New York time, or 6pm in the UK, we’ll learn what the FOMC have decided.
The Fed must weigh up two competing concerns. One is inflation – US consumer prices rose by 6% in February, compared with a year ago.
The Fed’s preferred inflation measure, the personal consumption expenditures price index, rose 5.4% from a year earlier in January while core PCE was up 4.7%, sharply above its inflation target of 2%.
Earlier this month, Fed chair Jerome Powell told Congress that the central bank could increase the size of its interest rate hikes and raise borrowing costs to higher levels, due to inflationary pressures. That led the markets to anticipate a half-point rate increase at this month’s meeting.
On the other hand, the US banking sector is in the worst turmoil since the 2008 financial crisis. The Fed’s existing rate increases have hit bond prices, leading to the crisis at Silicon Valley Bank which took losses on securities it had bought at the peak of the market.
As Robert Reich, a former US secretary of labor, wrote this week:
Higher rates could imperil more banks, especially those that used depositors’ money to purchase long-term bonds when interest rates were lower, as did Silicon Valley Bank.
That means that raising interest rates could cause more runs on more banks. The financial system is already shaky.
The two objectives – fighting inflation by raising rates, and avoiding a bank run – are in direct conflict. As the old song goes: “Something’s got to give.” What will it be?
The sensible thing would be for the Fed to pause rate hikes long enough to let the financial system calm down. Besides, inflation is receding, albeit slowly. So there’s no reason to risk more financial tumult.
But will the Fed see it that way?
My colleague Lauren Aratani will take the blog over, to cover all the action.
A pre-Fed catchup
Here’s a catch-up of today’s main stories so far, as the financial markets brace for the US Federal Reserve’s interest rate decision in less than 90 minutes time.
The City of London is expecting the Bank of England to raise interest rates to 4.25% tomorrow, after a surprise jump in UK inflation last month.
A quarter-point hike at noon on Thursday is seen as a 92% chance, after inflation surged to 10.4% in February due to high energy costs, food and clothing.
But, some economists predict the BoE could leave interest rates on hold.
High inflation, and the problems in the banking sector, are creating a dilemma for central banks:
And in other news, Switzerland is reeling from the rescue of Credit Suisse by UBS last weekend:
Amazon workers in the UK are planning further strike action as they dismissed as “an insult” a 50p an hour increase to its minimum hourly pay for warehouse workers to £11.
The Swiss pharmaceutical firm Novartis has ditched plans for a large clinical trial in the UK, in a further blow to the government’s efforts to make Britain an attractive place for research and investment after Brexit.
The former chief executive of the housebuilder Persimmon – famous for landing one of the biggest bonuses in British corporate history – has set up a new venture with his wife.
The boss of British Gas’s parent company has angered consumer groups by accepting a windfall £4.5m pay packet, including bonus payouts totalling £3.7m, despite an investigation into the treatment of vulnerable customers.
The International Monetary Fund has agreed a package of support for Ukraine worth $15.6bn (£12.8bn).
More than 2 million people have been contacted by bailiffs during the cost of living crisis, according to Citizens Advice, with a majority of those who came into contact with a debt collector reporting they felt harassed or intimidated.
Nick Leeson, the former rogue trader who caused the collapse of Barings Bank 28 years ago, has joined a firm of corporate private investigators.
And John Lewis may find it is fishing in an extremely small pool, if the retailer looks for like-minded investors….
In the City, the FTSE 100 share index has shrugged off the jump in UK inflation last month.
The FTSE 100 has ended the day at a one-week closing high of 7,566 points, up 30.6 points or 0.4%.
That’s its third daily gain in a row, as the rescue of Credit Suisse last weekend calms the markets.
Grocery technology firm Ocado (+1.95%) topped the risers, followed by banking giant HSBC (+1.9%).
IMF announces $15.6bn support package for Ukraine
Anna Isaac
The International Monetary Fund, the global lender of last resort, has agreed a package of support for Ukraine of $15.6bn (£12.8bn).
The loan, the first the Washington-based lender will make to a country at war, could represent one of the biggest tranches of financial support for Ukraine so far. It still needs to be signed off by the IMF’s executive board, a process that should conclude within weeks.
War had taken a “horrific humanitarian toll” on Ukraine, said Gavin Gray, the IMF’s mission chief for the country, but it also “continues to have a devastating impact on the economy”.
Ukraine’s economic output – GDP – shrank by 30% last year and poverty levels have risen significantly. Pressure on public spending to support the economy and manage its war effort is considerable.
Gray said:
“The authorities have nevertheless managed to maintain macroeconomic and financial stability, thanks to substantial external support and skilful policymaking.”
The pound would likely suffer a sharp sell-off if the Bank of England does not proceed with a 25bp hike in interest rates tomorrow, warns Matthew Ryan, head of market strategy at global financial services firm Ebury.
Ryan says:
“We expect the Bank of England to press ahead with a 25bp rate increase on Thursday, with the hotter-than-expected February UK inflation print effectively sealing the deal for another hike, in our view.
“For one, Britain is relatively isolated from the recent global banking troubles, and fears surrounding contagion have eased significantly in the past few days. Indeed, we think that the banking failures have been one-offs, driven by poor management decision making, rather than necessarily any systemic issues. Equity markets have rebounded, as have sterling and short-dated UK bond yields, indicating that investors are not unduly worried about the situation.
UK core inflation also remains sticky, and economic activity data has continued to hold up rather well, particularly on the labour market.
Asked about the UK’s productivity prospects, OBR chair Richard Hughes points out that all countries have seen a slowdown in productivity growth.
Since the financial crisis, the UK has been ‘quite successful’ in getting people into the labour force, boosting output that way, he says.
But…”we’ve been less successful in getting output per hour” to recover.
The budget does make a ‘meaningful impact’ on some of the economic challenges the UK faces, adds Richard Hughes.
The OBR chief points to attempts to lift labour participation side, which the watchdog thinks will lift the number of people in work in five years time by around 110,000.
However, that is against the 500,000 people lost from the workforce since the pandemic.
Hughes says:
So it by no means reverses that effect, but it makes a meaningful difference… to making up for some of the shortfall.
OBR chair Richard Hughes says we shouldn’t get “too preoccupied” about whether the UK falls into a technical recession (which the forecaster no longer expects).
A technical recession means GDP falling for two quarters in a row.
Even if that doesn’t happen, Hughes says the UK still faces “quite a tough economic outlook” because living standards are much lower (with a record fall expected).
Q: Are you confident that Rishi Sunak will hit his target of halving inflation by the end of the year?
There’s “a pretty high chance of that” happening, says the OBR’s David Miles. But he warns that “it could be blown of course, for sure”.
Miles points out that no-one predicted the surge in energy prices at the beginning of last year, which were the single biggest factor for inflation getting up to 10%.
As such, he won’t say that it’s “in the realms of near impossibility” that inflation is over 5% at the end of the year.
Q: How confident is the OBR in its forecast that inflation will drop to 2.9% by the end of the year?
Professor David Miles says this is a central forecast, so one can’t be “very confident” in nailing it.
And actually, even though this morning’s inflation reading was higher than forecast (at 10.4%), Miles suspects that the forecast for inflation at the end of this year could be slightly below 2.9% if the OBR calculated it today.
That’s because wholesale gas prices for the coming winter have fallen by 15% since the start of March, in a ‘dramatic way’, he says.
Andy King, a member of the OBR’s Budget Responsibility committee, warns the Treasury committee that in a “very volatile environment”, the OBR will make larger forecast revisions from one budget to the next.
There is a habit that bad news is absorbed into higher debt levels, while chancellor will tend to spend the good news – and that means debt will ratchet up, he points out.
In economist speak, that doesn’t sound very responsible, King adds.
OBR flags ‘fantasy tax rises’
The Treasury Committee begin today’s hearing by asking if last week’s budget was a responsible one.
Richard Hughes, chair of the Office for Budget Responsibility, says it was responsible, in the sense that the chancellor was still on track to meet the target of having debt falling as a share of GDP in five year’s time.
But, Hughes cautions, Jeremy Hunt only has a 52% chance of meeting his fiscal rules – which is the lowest since the OBR was set up [the OBR said last week that the chancellor only has £6.5bn of headroom].
Hughes also warns that fantasy tax rises, such as the perennially-postponed rise in fuel duty, are being used as fiscal ‘sleights of hand’ to flatter the outlook. If fuel duty keeps being frozen, that would cost £4bn at the end of the forecast.
He also points to “ambitions” to cut taxes, such as making the new temporary capital allowance in the corporation tax system, permanent. That would cost £10bn, and completely wipe out the headroom to hit the fiscal rules.
🗣 Our session with the @OBR_UK will start at the revised time of 2.35pm due to a vote in the House of Commons. Apologies for any inconvenience called.
📺 Watch the session live from 2.35pm 👇https://t.co/IqAWjSjrn1
— Treasury Committee (@CommonsTreasury) March 22, 2023
UK budget watchdog speaks to the Treasury Committee – watch live
Over in parliament, the Treasury Committee is about to begin questioning the Office for Budget Responsibility (OBR) about last week’s Spring Budget.
Richard Hughes, Chair of the OBR is there, along with Budget Responsibility Committee members Professor David Miles CBE and Andy King.
You may watch it live here:
There’s a nervy calm on Wall Street today, as trader await the Federal Reserve’s interest rate decision in four hour’s time.
The main indices are all slightly lower in early trading:
-
Dow Jones industrial average: down 11 points at 32,548, down 0.036%
-
S&P 500 index: down 1.7 points at 4,001, down 0.043%
-
Nasdaq Composite: down 9 points at 11,851, down 0.074%.
Daniel Takieddine, CEO for MENA at BDSwiss, says:
The Federal Reserve is expected to reveal its decision relating to interest rates later today. The uncertainty over the outcome continues to be an important issue for investors. A higher probability of seeing a 25 basis point hike is priced in market prices but a pause is also plausible due to the banking sector’s woes.
At the same time, the higher-than-expected inflation figures in the UK broke the current downtrend and could push the Bank of England into a tighter monetary policy direction. The decision could impact the stock market and the pound where investors have been uneasy with the slew of events of the last few days.
The UK labour market is likely to keep suffering from a shortage of workers, ratings agency Fitch predicts today – which could help push up wages.
In a new report, Fitch say that there has been a decline in the UK labour force since the start of the pandemic, largely due to an exodus of older workers who on the whole have little incentive to return to work.
Immigration may help to plug some of the gap, but labour shortages are likely to remain, they predict.
The report says:
The UK’s labour force is still smaller than it was before the pandemic, in contrast to most other major advanced economies. Fitch estimates that had the UK’s labour force continued to grow at its 2015-2019 trend rate, it would be around 2.5% bigger than it is today, equivalent to almost 900,000 workers.
Downing Street has said Rishi Sunak remains confident he will fulfil his pledge of halving inflation this year.
Asked about the rise in official figures, the Prime Minister’s spokesman said:
“This illustrates reducing inflation is not something that is automatic, it’s not something we’re on a glidepath to do, it requires discipline and making difficult decisions – that’s why we want to stick with our plan to get inflation under control.”
The Bank of England has predicted that inflation will sharply by the end of this year, partly due to ‘base effects’ (when the data catches up with price rises a year previously).
