Previous Articles

There’s no doubt the Federal Reserve holds a much more hawkish bias nowadays, but is their stance extreme enough to warrant a preemptive rate hike next week? No. While we may see ultra-hawkish FOMC members like Charles Plosser voting for a 25bp increase to 2.25%, the majority of Committee members will likely be hesitant to enact a hike as economic conditions in the US remain very weak. However, the FOMC will want to maintain appearances and will continue to remain inflation-focused, if only to keep consumer inflation expectations in check.

US Fed: Ready to Preemptively Hike Rates Next Week? Don’t Count On It.

There’s no doubt the Federal Reserve holds a much more hawkish bias nowadays, but is their stance extreme enough to warrant a preemptive rate hike next week? No. While we may see ultra-hawkish FOMC members like Charles Plosser voting for a 25bp increase to 2.25%, the majority of Committee members will likely be hesitant to enact a hike as economic conditions in the US remain very weak. However, the FOMC will want to maintain appearances and will continue to remain inflation-focused, if only to keep consumer inflation expectations in check.

Charles Plosser, Federal Reserve of Philadelphia President (Voting Member)

			"We need to take steps to insure that inflation does not get out of control. We need to act preemptively…Inflation has been gradually been creeping up and more than just in oil and food. The base of inflation is broadening.” – June 12, 2008
			“Monetary policy is quite accommodative right now…We have to be careful that in our accommodative policies and our efforts to support our economy, we don't make the mistake of creating inflation pressures.” – June 12, 2008

Jeffrey Lacker, Federal Reserve Bank of Richmond President (Alternate Voting Member)

			“While the growth outlook has improved a bit since the beginning of the year, the same cannot be said for the inflation outlook. The latest figures confirm that inflation is unacceptably high. The price index for personal consumption expenditure, increased 3.2 percent over the 12 months that ended in April, and that figure is likely to rise given Friday's CPI report for May.” – June 16, 2008
			“We have several ways of gauging expectations, none of them perfect, but they agree that inflation expectations are higher than I would like but are relatively stable…The apparent stability of inflation expectations does not justify complacency, however…As we move through this period of low growth, we need to be attuned to the risk that we emerge from the slowdown with inflation following a higher trend than when we went in.” – June 16, 2008

William Poole, Former Federal Reserve Bank of St. Louis President

			“We should be moving sooner rather than later…I don't think you can interpret what's happening with energy as a temporary shock...You want to keep wages behaving.” – June 17, 2008

BOE: Surprisingly Complacent As UK CPI Hits Fresh 16-Year High

At first glance, the drop in the British pound on Tuesday morning was somewhat surprising as the annual rate of UK CPI growth rocketed to a nearly 16-year high of 3.3%, prompting Bank of England Governor Mervyn King to write a letter to Chancellor of the Exchequer Alistair Darling explaining how inflation had gotten so out of control, and how the Bank plans on bringing CPI back down to the 2.0% target. However, it was the very letter that Mr. King penned that hammered the British pound lower, as he indicated that the Bank of England’s attempts to quell inflation growth would be over the course of two years, rather than one. Furthermore, Mr. King’s comments killed any hopes in the markets that rate hikes by the Bank of England were a sure thing. Indeed, the Bank of England has a dual mandate to maintain both price stability and economic growth. With the UK economy already slowing markedly, the Bank is worried that rate increases will push the country into recession. As a result, they are likely to leave rates steady throughout the year, as the Bank hopes that the UK economic slowdown will help to drive down domestic price growth.

Mervyn King, Bank of England Governor

			“Inflation has risen sharply this year, from 2.1% in December to 3.3% in May. That raise can be accounted for by large and, until recently, unanticipated increases in the prices of food, fuel, gas and electricity.” – June 16, 2008
			“As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%. I must stress, however, that there are considerable uncertainties, in both directions, around this…”– June 16, 2008
			“…CPI inflation is likely to remain markedly above the target until well into 2009. I expect, therefore, that this will be the first of a sequence f open letters over the next year or so.” – June 16, 2008
			“The Committee believes that, if Bank Rate were set to bring inflation back to the target within the next 12 months, the result would be unnecessary volatility in output and employment. So the MPC is aiming to return inflation to the 2% target within its normal forecast horizon of around two years...” – June 16, 2008
			“The path of Bank Rate that will be necessary to meet the 2% target is uncertain.” – June 16, 2008

Paul Tucker, Bank of England Monetary Policy Committee Member

			“I have for some years openly queried the notion that it is enough to rely on monetary policy ‘mopping up’ after the event… The doctrine effectively assumes that, faced with the possibility of systemic stress, the monetary authority can always reduce its policy rate without taking risks with inflation. There is a nasty shock to demand from tightening credit conditions, here and abroad. And that may get worse rather than better in the coming months.” – June 13, 2008
			“But, absolutely crucially, we also face a nasty shock to costs from rising commodity prices and sterling’s depreciation. That is going to push up UK inflation over the next few months, creating a risk of upward pressure on pay and higher inflation expectations.” – June 13, 2008
			“The MPC’s strategy to date has been clear: to offset part but not all of the shock to demand, consistent with an overriding determination to maintain medium-term inflation expectations anchored to the 2% target. The path of rates will depend on judgments about the balance of those risks to the inflation outlook. And, in the context of my remarks today, that is different from a ‘mopping up’ strategy involving simply reducing rates enough to offset estimates of the effect of the demand shock plus some insurance on top of that.” – June 13, 2008

ECB: Ready To Act?

The European Central Bank has been throwing around quite a bit of hawkish commentary lately, as various members have called rates “accommodative” and have said the Governing Council is in “a state of heightened alertness.” It seems that - barring a bout of major tightening in the credit markets within the next few weeks - the ECB is sure to raise interest rates by 25bps to 4.25%.

Lorenzo Bini Smaghi, European Central Bank Executive Board Member

			“In our opinion, given the current market conditions, a hike, that I would describe as significant even if of only 0.25 basis points, should be enough to bring inflation within the objective of 2 percent within the next 18 to 24 months.”

Gertrude Tumpel-Gugerell, European Central Bank Executive Board Member

			“Monetary policy is on the accommodative side and inflation expectations are trending upwards…Both require us to be cautious today too…This is why we have said that, under present conditions, the ECB Governing Council could raise interest rates slightly in the near future.” June 16, 2008

Guy Quaden, European Central Bank Governing Council Member

			“It is, I think, legitimate, to contemplate a limited adjustment of our monetary policy stance in order to assure a solid anchoring of inflationary expectations and the return to price stability in the medium-term.” – June 12, 2008