Morning Brief – A world apart

A world apart

Despite the Federal Reserve’s meeting still being digested by markets this morning, the Bank of England’s own monetary policy decision is just a few hours away. Perhaps counterintuitively, the juxtaposition between central banks is likely to become more apparent as we enter the next phase of monetary policy adjustment. Most central banks have now entered the wait and see phase. Benchmark rates are generally very high from the scramble to adjust policy in the face of rising inflation over the past year or so. As a result, central bankers are comfortable to leave rates in this restrictive zone as monetary conditions continue to feed into the real economy. There will start to become opportunities for policy divergence which will be critical for the FX market as restrictive rates and decisions to pause fade into a shift towards stimulus once again.

Worlds apart from the paradigm I describe above is Japan. We have covered the central bank closely in recent briefings, but fiscal policy has been the target of Prime Minister Fumio Kishida overnight. A stimulus package estimated to be worth over US$100bn will intend to boost economic activity as the nation continues to obtain record low bond yields. This will continue to add pressure on the BoJ to end controversial measures including yield curve control and record levels of monetary stimulus. However, as we have learnt in recent years, applying external logic and reason to the BoJ doesn’t always pay off. Despite the fiscal stimulus promised, the chasm between respective national policies could continue to grow.  

Back to the decision last night. The Fed continued to imply its commendation to the market for doing much of its job for it and raising the implied rates of US yields across the board. The narrative unsurprisingly despite a decision to hold continued to favour additional hikes further down the road. Fed Chairman Jay Powell unsurprisingly painted an image of the Committee seeking to identify whether further policy tightening would be required rather than one judging whether the job was over. Looking ahead we can expect a similar outcome from today’s Bank of England decision with markets more focussed on the updated BoE forecasts than the outcome of the policy decision.

Discussion and Analysis by Charles Porter

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