Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The markets are edgy this morning after the US Federal Reserve surprised investors by indicating that interest rates will rise from record lows sooner than expected, as the US recovery gather speed.
The Fed’s new projections, released after its latest policy meeting yesterday, indicate at least two rate increases are expected in 2023 – previously a majority of officials had seen them on hold until 2024.
The Fed also began the process of “talking-about-talking-about” how it might end its bond-buying programme, a sign it is moving a little closer towards exiting its crisis-era stimulus measures.
John Abruzzi
(@CheksNBalances)The Federal Reserve Dot Plot
Rising rates may be in our future, but it’s going to be a slow and gradual process.https://t.co/svzVh6dOtk#FOMC #TransformingEconomy #FederalReserve #TheFed #Powell #economy #EconTwitter #dotplot #money #inflation #transitory #EURUSD #USD #Fed pic.twitter.com/PIoHGFiWPr
This unexpectedly hawkish move knocked stocks on Wall Street last night, where the S&P 500 finished 0.5% lower.
The prospect of earlier interest rate rises has also driven the dollar up to a two-month high, and pushing the pound below $1.40 for the first time in over five weeks.
Chronos Caerus
(@ChronosCaerus)US Dollar touching around 8-week highs of 91.445 in asia/pacific market overnight on hawkish US monetary policy
European markets are heading for a lower open too.
IGSquawk
(@IGSquawk)European Opening Calls:#FTSE 7157 -0.39%#DAX 15669 -0.27%#CAC 6636 -0.26%#AEX 732 -0.24%#MIB 25708 -0.23%#IBEX 9177 -0.28%#OMX 2278 -0.37%#STOXX 4138 -0.34%#IGOpeningCall
Ronnie
(@Ronniemarkets)Equity futures fall gathering momentum, dollar strengthening. #ftse100 #DOW #DAX30
The Fed also raised its forecasts for growth this year to a blistering 7%, from 6.5% previously, but also expects higher inflation — 3.4%, up from 2.4% eyed back in March.
As we blogged last night, Fed chair Powell insisted that the central bank wouldn’t change course until it sees “substantial further progress” on employment and inflation.
“Lift-off is well into the future.
“We’re very far from maximum employment, for example, it’s a consideration for the future.”
He also argued that the jump in inflation in the US will be temporary, and expressed confidence about the prospects for growth, and job creation.
The Fed chair also highlighted that the pace of recovery in the labor market has been uneven, saying:
The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit.
But… he did also flag that inflation could turn out to be “higher and more persistent” than expected, saying the Fed would use its tools if necessary.
Astrid Doerner
(@AstridDoerner)5 minutes into the presser, #Fed Chair #Powell already hat some strong statements:
1) Inflation could turn out to be higher and more persistent that we expect.
2) unemployment assistance may hold back workers wanting to go back to work
3) variants remain a risk #Handelsblatt
And Powell was also clear that the Fed will slow (or taper) its asset purchase stimulus package when the moment is right.
We will do what we can to avoid a market reaction, but ultimately when we achieve our macroeconomic goal we will taper, as appropriate.
Currently, the FOMC is buying $120bn per month of bonds with newly minted money.
Powell also tried to cool interest in the Fed’s rate predictions, or dot-plots, insisting that they weren’t a great forecaster (each official says where they think interest rates will be over the coming years)
Hannah Lang
(@hannahdlang)Powell bashes the dot plot, saying “the dots are not a great forecaster of future rate moves” and should be taken “with a grain of salt.”
Investors see last night’s meeting, and press conference, as a significant moment.
As Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, explains:
“This time there was no denying it, the Federal Reserve took its first tentative steps on a more hawkish path. It was instantly felt in markets. While there was no immediate change in policy, the median projections for interest rates saw two hikes leap into the forecast for the end of 2023. Additionally, the talking about tapering finally began. However, Chair Powell suggested a start to tapering still remained a “ways off” as the FOMC continues to look for further progress in the economy.
The Fed’s economic forecasts shifted higher as it recognized that growth this year is going to be even stronger that it had already forecast. The 7% growth rate expected is now above economists’ consensus expectations, although forecasters are more optimistic about growth in 2022 than the US central bank. Elsewhere, the Fed’s forecasts now show a clear bias to above target inflation in the coming years. PCE inflation is forecast to be above target over the next 3 years.
The agenda
- 7am BST: Eurozone new car registrations for May
- 9.30am BST: ONS survey on business insights and the impact of the pandemic on the UK economy
- 10am BST: Eurozone inflation for May (final reading)
- 1.30pm BST: US weekly jobless figures
