The Fed Hold, but Bank of England On a Knife Edge

Thought for Thursday

"It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So" - Mark Twain

FOMC

Last night the Federal Reserve met market expectations in maintaining their benchmark policy target rate of 5.25-5.5% - its highest level in 23 years. While this marked the eighth consecutive hold, policy makers signalled that monetary loosening could be enacted soon.

With the FOMC noting that there was “further progress” to be made in bringing inflation back down to the Fed’s 2% target, in similarity with previous meetings, they argued that they would need “greater confidence” that inflationary pressures are easing.

As we looked at yesterday, since the last meeting in June, data indicates that headline inflation eased from 3.3% in May to 3% in June, while the latest PCE data released five days ago show prices rose 0.1% in June, core increase 0.2% and the 12-month PCE index fall to 2.5% from 2.6%. Accordingly, Powell stated that “The second quarter’s inflation readings have added to our confidence and more good data would further strengthen that confidence”.

Nonetheless, during the FOMC’s press conference, Powell stated that “a reduction in our policy rate could be on the table as soon as the next meeting in September”.

Following the release of the Fed’s dot plot during their previous meeting, policy makers were forecasting just one cut this year – down from the three cuts projected during their March meeting. Given that at the start of the year markets were pointing towards six rate cuts over 2024, yesterday evening served as a further reminder that the Fed’s battle to bring inflation down has lasted longer than might have been predicted.

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All Eyes on the BoE

With the release of yesterday’s interest rate decision, attention now turns to the Bank of England’s Monetary Policy Committee at 12 noon today. Here, markets are more or less 50/50 on whether the central bank will conduct a cut or a hold from the current 5.25% rate.

Since the last meeting, figures released from the ONS indicate that UK inflation held firm throughout June, with headline CPI at 2%. This broadly came in line with market expectations and follows May’s print which marked the first time that inflation had fallen back in line with the Bank of England’s target since July 2021.

Nevertheless, Hawks will point to how core inflation remains elevated at 3.5%. Given that this is 1.5 percentage points above CPI, this indicates how services inflation continues to cause a headache for policy makers given how ‘sticky’ it is proving. It’s a similar situation with service inflation which remains at 5.7%.

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Thames Water

Yesterday we saw Olympic triathletes swim in the river Seine in Paris – the first time in 100 years that a competitive race has taken place in the river. Plaudits to France for getting this done – and even if the cost was more than a billion euros, that sounds cheap when compared to how much London is spending to clean up the Thames.?

The Tideway Tunnel, which has cost ￡4.5bn to build, comes online later this year and will hopefully spell the end of discharging sewage into the Thames – a far cry from last year where Thames Water made a whisker under 17,000 illegal discharges.

Thames Water is back in the news, with both Moody’s and S&P cutting their credit rating to junk status over the last week. The downgrade means the company is now in breach of its operating license and one step closer to being forced into administration by the government.

Water bills are set to rise by ~20% which would go some way to helping the embattled company’s finances, but Thames Water wanted 45% to keep them afloat – mercifully for the bill payers this was shot down by Ofwat. Now the company that has delivered the Tideway Tunnel, which it leases to Thames Water, is concerned that the company may start to miss or reduce some of the payments, instead choosing to prioritise buying chemicals and paying for electricity – which are presumably easier for suppliers to cut off access to – rather than paying for the tunnel.