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What will the Fed’s ‘dot plot’ reveal about longer-term rates?


What will the Fed’s ‘dot plot’ reveal about longer-term rate expectations?

The Federal Reserve is widely expected to conclude its last policy meeting for the year on Wednesday with an announcement that it will raise interest rates by 0.5 percentage points, slowing its pace after four consecutive 0.75 percentage point increases.

Fed chair Jay Powell said in a speech last week that the time to slow its pace of increases may come as soon as December and acknowledged that the US central bank was concerned about the prospects of overtightening policy. The slowdown has come as US data have begun to show evidence of cooling inflation. In October consumer prices rose but at their slowest rate since January.

The real story, however, will be in the Fed’s “dot plot”, a survey of officials on where they believe interest rates, inflation, unemployment and gross domestic product will be in the years to come. Rate estimates in the survey are expected to have increased meaningfully from September and show a Fed that is prepared to keep policy tighter for longer.

At present, the futures market shows investors expect interest rates to peak in May at about 5 per cent before the Fed is forced to cut rates by the end of the year by at least 0.5 percentage points. But New York Fed president John Williams, a close colleague of Powell’s, has indicated that he does not expect the bank to cut interest rates until at least 2024. A dot plot showing tighter policy through the end of 2023 could force investors at present betting on looser monetary policy to adjust their positions. Kate Duguid

How will fresh data affect the BoE’s interest rate decision?

Investors expect the Bank of England to slow the pace of rate increases on Thursday but economists noted that data released at the start of the week could still change the outcome.

Markets are pricing in an 80 per cent probability that the central bank will increase its policy rate by half a percentage point to 3.5 per cent. The BoE has been battling the fastest pace of inflation in 41 years and raised the benchmark by 0.75 percentage points in November.

Anna Titareva, European economist at UBS, expects “the majority of the [Monetary Policy] Committee to vote in favour of a smaller rate increase”.

This is because medium-term inflation expectations “have eased in recent months”, while several members of the BoE “have noted indications of an easing in labour demand”, she said. “Last but not least, given the lags in monetary policy transmission, most of the impact of the hikes already delivered is still yet to come, with the magnitude subject to significant uncertainty.”

Elizabeth Martins, economist at HSBC, also thinks the BoE will increase rates by 50 basis points but noted that influential economic releases may sway members of the committee.

These include November’s CPI inflation data, which economists polled by Reuters expect to have slowed to 10.9 per cent from 11.1 per cent in October; October’s GDP, set to show a small gain of 0.4 per cent; and the labour market report, which is forecast to show more signs of falling job vacancies and declining employment numbers.

“If all three come out strong, it might tip the balance [of the MPC] towards a larger hike,” said Martins. Valentina Romei

Will the ECB slow the pace of rate rises?

Eurozone inflation is falling, the economy is on the brink of recession and interest rates are at their highest level since the 2008 financial crisis. So many economists think it is time for the European Central Bank to switch to smaller rate rises at its meeting on Thursday.

This means a third consecutive 75 basis point rate rise by the ECB seems unlikely. But the final decision may hinge on how quickly the bank expects inflation to return to its 2 per cent target in new forecasts it will publish after its December 15 meeting.

Most economists expect the ECB to revise its inflation projections upwards for the next two years due to rising wages and the delayed impact of high energy costs hitting consumers. But most think the central bank will still forecast inflation returning to its target by 2025.

Silvia Ardagna, chief European economist at Barclays, said this would allow the ECB to “slow the hiking pace to 50 basis points, considering that the 200 basis points of rate hikes delivered so far will have a significant effect on future inflation”.

However, some ECB watchers, such as ING head of macro research Carsten Brzeski, think a 75 basis point rate rise “is clearly still on the table”. But he added that a compromise could be found for a 50-point rate rise if it comes with “hawkish communication” and an agreement to start shrinking the ECB’s €5tn bond portfolio early next year. Martin Arnold



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