FOMC meeting: +0.75% and then?

On Monday, the European Commission’s statistical office confirmed that inflation in the eurozone had hit two figures, reaching 10.7% in October vs. 9.9% the previous month. Year-on-year, energy prices have rise by 41.9% and food prices by 13.1%. The countries suffering the most are the Baltic countries with inflation of more than 20%. On the other side of the spectrum, France and Spain are experiencing the lowest inflation in the zone, with “only” 7.1% in France and 7.3% in Spain. France’s relative resistance to the phenomenon can be explained in part by the adoption of consumer protection measures and in particular a subsidy to the price of gasoline. At the same time, growth figures for the third quarter were published. The GDP of the nineteen eurozone countries grew a measly 0.2%, down from 0.8% in the second quarter. Data published in the last few days on both sides of the Atlantic point to a gloomy economic environment, with composite purchasing managers’ indices declining and consumer confidence on the decline. In Switzerland, consumers are also worried about their financial future: the consumer climate index is at a 50-year low.

As expected, the European Central Bank raised its key interest rate by three-quarters of a point. The deposit rate was raised to 1.5% from -0.5% in July. This 200 basis point increase is the fastest rise in the single currency’s history. Christine Lagarde, President of the European Central Bank, said that the peak of the current interest rate hike cycle should ensure that inflation returns to the 2% medium-term target. Which begs the question: where is the peak? “Inflation is still too high throughout the Eurozone”, she said while pointing to the risk that inflation will become self-sustaining.

The Reserve Bank of Australia raised interest rates by a quarter point and signalled a further tightening to come in its fight against inflation. The Reserve Bank’s Board of Directors raised the discount rate from 2.6% to 2.85%, the highest level since April 2013, a well-anticipated result. RBA Governor Philip Lowe stated in his post-meeting statement that “[t]he Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour”. The central bank also lowered its economic growth outlook in response to rising interest rates.

For its part, the Swiss National Bank posted a loss of CHF 142.4 billion for the first nine months of the year, which is almost entirely attributable to the central bank’s foreign exchange positions. The SNB also lost value on its gold holdings and its Swiss currency positions. These figures put the SNB on the path of the highest annual loss ever recorded. While these results do not influence monetary policy, they make it increasingly unlikely that the institution will pay dividends to the Swiss government and cantons. If this were the case, it would only be the second time in more than 100 years of history that it would have to forgo such a payment.

Although the US Federal Reserve’s policy makers have been in a Black-Out Period for more than a week, there was a notable change in tone in mid-October. Several FOMC members have begun to suggest that there may be a need to signal a deceleration in rate hikes in the coming months. And this is where the Fed’s meeting is important today: it is not a question of knowing by how much rates will increase, since the market almost certainly expects a further 75 basis point hike. Rather, the question is when the FOMC will slow down the pace of rate hikes (the famous “pivot”) and at what level the Fed’s main rate will peak in 2023. The employment figures published yesterday were better than expected, prompting some analysts to believe that the Fed could continue to raise rates steadily over the coming months.