The US Federal Reserve and Bank of England will be in the investor spotlight this coming Wednesday and Thursday

They will provide commentary on expected further monetary tightening and reveal interest rate decisions, which have been the dominant influence on stock market behaviour this year.

Jerome Powell, Fed chair, stated that the Federal Open Markets Committee was committed to driving inflation down with more rate increases following three 75-basis point hikes in June and July and September. He also said that there was no easy way to lower inflation.

At the time, it was anticipated that 100bps would be added by the end of this year.

However, there is increasing speculation in the markets that the Fed will raise its rate by 75bps this month. This could signal a possible move to lower rates in the coming months.

According to The Wall Street Journal, some Fed officials were concerned about tightening and there will be a lot of discussion at the meeting this week.

“There are growing signs of economic slowdown and liquidity concerns in bond markets,” said Deutsche Bank, while smaller-than-expected hikes by the Bank of Canada and dovish musings from the ECB have “fuelled another attempt to price in a pivot”.

“So, whether the Fed pours cold water over these expectations will be crucial.”

The majority of economists predict that the central bank will raise its interest rate by 75 basis points next week, and then again in December.

Deutsche predicts that rates will reach a terminal rate of 4.9% in February. Rate cuts are expected in 2023 after a moderate recession.

CMC Markets’ Michael Hewson noted that core inflation will fall to 4.5% this year, before falling back to 2.1% in 2025. However, “a series of Fed talks” have highlighted the possibility of more aggressive tightening. This would mean that the Fed Funds Rate could rise to 4.75% by the year-end, which would make the Fed Funds rate even higher.

Fed vice chair Lael brainard has publicly expressed concern about the current pace of the hiking cycle, but Mary Daly, San Francisco Fed President, said that November might be the right time to talk about slowing down hikes.

The Chicago PMI survey, ISM manufacturing data numbers and price numbers on Tuesday, and MBA mortgage applications data earlier Wednesday will fuel market speculation.

Bank of England Decision

After a few weeks of being out of the news, London’s policymakers will be back in action. This is after the Bank of England intervened in the bond markets following the disastrous Liz Truss-Kwasi Kwarteng fiscal fiasco.

The recent weakness of the pound and political turmoil has had a significant upward effect on UK inflation as well as the housing market. This is in addition to the effects of the rate increases so far this year from the Bank’s Monetary Policy Committee.

The question of Threadneedle Street’s potential hike is still open to debate, and whether it will be at 50bps or 75bps.

The BoE’s monetary policy committee has plenty to think about, with Rishi Sunak, the new Prime Minister, stating that the UK is in “a deep economic crisis”.

Bank of England to hike by 75 bps on November 3rd or may go higher

“The central bank’s staff communicates with Treasury officials, and will already know an outline of the new fiscal policies as input for next week’s rate decision,” Rabobank stated. They forecast a 75bps rate hike on Thursday and an eventual rate peak at 4.75%.

“Even though markets are now at their calmest, we’ll learn on Thursday that monetary policy and fiscal policy will be much tighter than anyone imagined in September.”

Hewson of CMC stated that the tightening of fiscal policies means that the Bank of England’s ability to be more aggressive is now less possible due to concerns over the impact on the demand.

It seems a bit too late to do that at the moment, considering that the actions taken by the government to raise taxes are likely to mean that any recession will now be much longer, which could lead to the pound staying under pressure for longer.

He stated that it seemed “more probable than not” that there would be a 50bps increase.

Ruth Gregory, Capital Economics believes it is closer to calling whether the MPC will offer a 75bps to 100bps increase due to domestic inflationary pressures increasing and tightness within the labour market.

She stated that “on balance, we believe that the MPC would go for 100bps, taking the Bank Rate from 2.25 to 3.25%.”

James Smith, an ING economist, stated that although he thought it impossible just a few weeks back, he believes a 50bps rate increase is much more likely.

In recent speeches, policymakers signalled that the markets underestimated the extent of tightening to come in recent speeches. The expected boost from fiscal policies now looks very similar to what was expected after the recent policy U-turns.

This is despite the fact that the Bank opted against a 75bp increase. We believe that there is a good possibility now that the Bank will not deliver on market/economist expectations, as the latest data doesn’t support a faster increase and the sterling is stronger than before September’s meeting.

The MPC will also release its most recent economic forecasts regarding inflation and GDP.

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