Reuters Econ World: Fed on a roller coaster
By Carmel Crimmins
May 22 -Hello, and welcome to the first edition of this newsletter, the perfect weekly companion to my new podcast.
It feels right that this snapshot of the most important economics news and analysis should arrive in your inbox every Wednesday. Lately, we've taken to affectionately referring to Wednesday at Reuters as "Fun-day Fed-day." Whether it's being milliseconds ahead on the latest interest rate decision, or deciphering Federal Open Market Committee (FOMC) minutes for what lies ahead, our U.S. central bank watchers are all over it.
Today's minutes of their last meeting show that Fed chiefs held faith that price pressures would ease, if slowly. But they also reveal the willingness of some committee members to raise rates if inflation risks get worse. And that's casting shade on what happens to rates next. Traders' bets show rising doubt about more than one rate cut this year. Goldman Sachs CEO David Solomon says he doesn't even expect a single cut before the ball drops for New Year. Powell keeps preaching patience, but it may be the rest of the world that has to act faster on the rising dollar.
I asked Fed reporter Howard Schneider to send me his quick take after filing his story on where the U.S. will take us from here and he said:
"On a likely roller coaster. The basic faith in falling inflation and, by implication, eventual rate cuts, is still there, but it’s become a weak-kneed sort of belief that’s in no rush to be tested and is less certain about the fundamentals. They have three or four working scenarios for what the rest of the year looks like and that could end anywhere from a modest cut late in the year to no cuts at all or, in the extreme, another increase."
The focus on hitting that 2% inflation bullseye now shifts to the other side of the pond. Consumer prices rose by an annual 2.3% in April, dashing hopes of a lower reading and prompting investors to pull bets on a June rate cut by the Bank of England. That didn't stop Prime Minister Rishi Sunak from calling an election.
Sunak essentially is now a test case for Western politicians facing electorates that list the sametop trending issue – the economy. The opposition Labour Party is running about 20 percentage points ahead in the polls, but it remains to be seen what an environment of falling interest rates would do for an incumbent's political viability.
In Frankfurt, the European Central Bank (ECB) has all but promised a rate cut on June 6 even though inflation is still coming in above 2%. ECB President Christine Lagarde says she is "really confident" that price pressures in the euro zone are under control.
But can that confidence last? With prospects of sequential rate cuts before the end of the year fading fast in the United States, the dollar is skyrocketing, and that could reignite global inflation.
No wonder the Fed is turning to classic hip-hop to navigate all of this uncertainty.
Say what?
Ok not really, but they are asking themselves “What’s the scenario?” as they shift away from explicit guidance on the likelihood of rate cuts. Think “Scenario” by A Tribe Called Quest with x and y charts.
And with that, it’s mic drop time for me.
As always, I'm interested in your comments on this week's episode. Reply to this email or find me on LinkedIn.
THE CHART
He's no Phife Dawg, but the chart of the week comes to you from our very own US Economics Editor Dan Burns with this snapshot of the key data informing the Fed's thinking
THE PODCAST
You may have heard – I HAVE A NEW PODCAST!!! Each week, I dive deep into an economic concept that is driving the biggest news around the world. Episode 1 just dropped and it's all about protectionism. I have the perfect guest in Motor City native, turned China bureau chief Kevin Krolicki to debate the ins and outs of tariffs on electric vehicles.
“Part of the important realization here is Chinese EVs are really good. They are at price points that Western car companies can't possibly match.”-Kevin on Episode 1
THE HEADLINES
Rich nations are earning billions from a pledge to fix climate change
From tax to homes, how the economy will decide the UK election
THE REAL WORLD
South Africa: In the village of Komati, the party of Nelson Mandela is gettinga decidedly frosty reception over coal plants.
Spain: Tourism is helping Spain grow faster than its euro zone peers, but it's not making the locals very happy.
India: Jewelryswaps prompt gold prices to fall.
THE WEEK AHEAD
May 23: Japan CPI
May 24: S&P global scheduled to review Zambia's sovereign credit rating
May 27: Reuters poll: New Zealand housing market outlook
May 28: ECB publishes the Consumer Expectations Survey
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Rates and inflation Rates and inflation https://graphics.reuters.com/USA-FED/INFLATION/gkvlgnaywpb/chart.png
Editing by Rod Nickel
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