The most important event of the week seems to be the meeting of the FOMC (Federal Open Market Committee) regarding, among others, the level of interest rates in the United States and additional measures to support the American economy, labor market and inflation.
The decision itself, together with the announcement, will be made on Wednesday, September 16 at 20:00. At the same time, the Fed's macroeconomic projections will be published, i.e. attempts to determine the sustainability of the economic recovery and its scale. In the projections, we will see how the Fed is oriented towards future interest rates in the U.S., GDP, labor market, or price increases in the economy.
Jerome Powell, Chairman of the Federal Reserve, has already announced that the Fed will tolerate periods of inflation slightly above 2 percent by moving to an average inflation target of 2 percent. As a result, this may mean that interest rates will be low in the US for a longer period of time. A new communication from the Fed may include a timeframe, e.g., stating that interest rates will not increase before the end of 2022. The Fed may also add a labour market condition - e.g., it will not raise interest rates until the unemployment rate falls to 5 percent. The Fed may also specify the period in which it will want to calculate average inflation.
Meanwhile, inflation in the U.S. has unexpectedly accelerated, beating the market consensus. Consumer prices (CPI inflation) in the United States rose by 0.4% month-on-month in August 2020, after rising by 0.6% in July. The forecast assumed an increase of 0.3 percent. The data shows that the sharp rise in prices of used cars and trucks had the biggest impact on the overall price increase, but also the prices of gasoline, recreation and home furnishings rose. Energy prices rose by 0.9 percent due to a 2 percent rise in gasoline prices.
In mid-September, other central banks will also make decisions. In Poland, on September 15, the Monetary Policy Council will announce the level of interest rates to which it will issue an announcement at 4 p.m. On September 17, in turn, the Bank of Japan will tell investors how it looks at monetary policy and the economy. On the same day, at 1 p.m., the Bank of England decision will be published.
For the Bank of England, the combination of low inflation, higher unemployment and a longer period of economic recovery indicates further monetary stimulation. The main question for the markets next week will be whether the Bank of England will signal a more cautious outlook, but also whether decision-makers will give any further indications for interest rate cuts. This week, the money market has been pricing the Bank of England's main interest rate cut by 10 bps already at the beginning of next year, which also seemed to lead to a weakening of the pound. The GBP/USD exchange rate fell by about 3.5 percent in a week.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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