Fed, BoE and BoJ: three different economies and three different policies
The Federal Reserve, the Bank of England and the Bank of Japan all hold monetary policy meetings this week, with the Fed due on Wednesday 29 July, the BoE on Thursday 30 July and the BoJ on Friday 31 July.
The central scenario points to a pause in all three cases. Consensus expects the Federal Reserve to keep rates in the 3.50%-3.75% range, the Bank of England at 3.75% and the Bank of Japan at 1%.
Behind that apparent calm, however, sit very different realities. While the Fed is debating whether the recent energy shock could delay the disinflation process, the Bank of England appears willing to buy time before making its next move. In Japan, by contrast, the main concern is the impact of yen depreciation on imported inflation.
Fed: markets are divided, but a hawkish hold remains the central case
The market is divided ahead of the Fed's Wednesday decision, due at 20:00, followed by Kevin Warsh's press conference at 20:30. Fed funds pricing implies a 68.5% probability that rates stay at 3.75%, while the probability of a 25-basis-point increase to 4.00% stands at 31.5%.
Warsh's shift towards a more restrictive stance, the move away from forward guidance and divisions within the FOMC help explain the current uncertainty, which could become the norm over the next few meetings.
A rate hike cannot be ruled out. The market has already priced in part of that move, and Warsh would send a strong signal about his commitment to fighting inflation. Such a move could help restrain the rise in longer-dated yields, leading to a flatter curve.
