Week ending 4th November 2022.

The Fed gave mixed signals about the outlook for US interest rates this week.

In the official statement accompanying the widely expected 0.75% increase in US interest rates, it stated that policymakers would “take into account the cumulative tightening of monetary policy [and] the lags with which monetary policy affects economic activity and inflation.”

This to us is a clear indication that the US central bank was planning to slow the pace of its monetary tightening after four large consecutive interest rate increases.

But then came the press conference by the Fed chair, Jay Powell – and he stated that while the future path may have smaller interest rate increases, US interest rates will go higher than previously projected.

US interest rates have now been increased from 0.25% at the start of the year to 4% today (which is a very aggressive increase by any standards, but more so when viewed from the low starting position), and it should be remembered that historically interest rate changes can often take several months or quarters to work their way through to the economy – and as such it is highly unlikely that the full effects of the earlier interest rate increases have been fully felt.

Consequently, as we have previously stated, by increasing interest rates this aggressively, US central bank policymakers may soon become Milton Friedman’s ‘the fool-in-the-shower’ (where a person gets burnt by hot water after they turn the hot water all the way up given the shower water initially came through cold – in other words, Fed policymakers need to take a break and assess the impact of their previous increases).

Thankfully, in the UK yesterday (Thursday 3 November 2022) the BoE did not follow in the Fed’s footsteps.

While the BoE increased UK interest rates by 0.75%, policymakers made it very clear that this large increase was a one-off – and although they didn’t rule out further increases, they did state that they have no intention on increasing interest rates as high as the financial markets currently expect.

Interestingly, the Reserve Bank of Australia also indicated this week that it is done with aggressive interest rate increases as it said that it sees Australian CPI inflation cooling to 3% by the end of 2024 and as a result opted for a small increase in interest rates of just 0.25%. This, coupled with speculation that China was planning to ease coronavirus restrictions, helped sentiment towards Asia-Pacific equity markets.

Looking ahead to this coming week we have US & Chinese CPI inflation; Chinese & Japanese PPI inflation; UK Q3 GDP; UK industrial production; Eurozone retail sales; and the University of Michigan Consumer Sentiment index.

Investment Management Team