An important week is the current one with the central bank summits in the attention of investors. It starts today with the Federal Reserve and tomorrow with the ECB. What to expect ask T. Rowe Price analysts.
According to Blerina Uruci, Chief US Economist, regarding today’s announcement by the Fed on monetary policies, we expect: “1) a slowdown in the rate of hikes to 25bp (from 50bp in December); 2) A repeat of December’s dot plot message: Fed Funds rates will peak above 5% and no cuts this year; 3) Powell will speak more explicitly about the recent slowdown in inflation compared to December, but will also emphasize the need for lower inflation to be sustainable over a longer period; 4) The Fed will have a broader reaction function, based on labor market resilience, inflation and growth (in 2022 the only point was inflation). If the data lives up to my expectations, this scenario will set the stage for a dovish turnaround later in the year.” “More generally, in 2023 I expect a terminal rate of 5% with the risk of a small overrun and cuts of 75 bp in the fourth quarter, when the economy enters a recession” continues the expert who concludes “the most probable scenario is a rise of 25bps in February, another 25bps in March and a possible further rise of 25bps in May, if the data permits. Pricing in a terminal rate of 6% or higher will require a renewed acceleration of inflation and convincing evidence that rules out a recession.
Turning to the ECB, Tomasz Wieladek, Chief European Economist of T. Rowe Price, expects “a 50 basis point hike and hawkish communication. Recent data, both on the core CPI inflation and economic activity fronts, surprised on the upside from December and support a more hawkish communication on future hikes. While the 50bp hike is already priced in, I see a growing risk that the peak deposit rate will turn out to be higher than markets expect today.” Simply put, the ECB will look beyond weak fourth-quarter German manufacturing data and focus instead on CPI inflation. In our view, we can expect a super-hawkish ECB at the next two meetings” continued the analyst.