Week Ahead: Federal Reserve set to hike

Attention this week is firmly on the Federal Reserve, which is widely expected to raise rates again. Also in action in a busy week for central banks are the Reserve Bank of Australia and the Bank of England. Meanwhile earnings season continues with names including Shopify, Airbnb and Peloton. 

Federal Reserve 

Over a week ago Fed chair Jay Powell stressed that taming inflation is “essential” and said a 50bps hike is on the table in May.  

Last month Lael Brainard, a Fed governor and vice-chair in-waiting, and notably the leading voice on the more dovish wing of the FOMC, began a speech with quotes from Paul Volcker. “Forty years ago, Paul Volcker noted that the dual mandate isn’t an either-or proposition and that runaway inflation ‘would be the greatest threat to the continuing growth of the economy… and ultimately, to employment’.”  

She then went on to quote another former Fed chair, Arthur Burns, who noted in the late 1960s that “there can be little doubt that poor people…are the chief sufferers of inflation”.  

That’s now the two big beasts channelling Volcker. On March 3rd, Senator Shelby asked Powell: “Volcker put the economy in a recession to get inflation under control. Are you prepared to do what it takes to get inflation under control?” Powell replied: “I hope history will record that the answer to your question is yes.” Hawkish credentials assured, 50bps of hikes in May and June are nailed on.  

Market is pricing for aggressive rate hike cycle with multiple 50bps hikes to 1.9% by August and 2.7% by the end of the year, a level at which it would be actively restraining potential. It would be the swiftest pace of rate hikes since the Volcker era. Hawk James Bullard has even floated the idea of a 75bps hike. 

A lot the questions will be about where policymakers expect to go over the coming months and whether they see the terminal rate going up. After the Fed meeting on Wednesday, attention shifts to the US nonfarm payrolls report on Friday, though this has lost some importance given the Fed’s hawkish pivot. 

Bank of England 

UK inflation surged to 7% in March, the highest reading in 30 years. Bank of England governor Andrew Bailey is worried about persistently high inflation but warned policymakers are walking a ‘fine line’ trading off the need to tackle inflation with the risk of sparking a recession that further hurts consumers. Despite worries about slowing growth, a tight labour market gives the BoE the room to raise rates for the fourth straight meeting next week. This would take the base rate to 1%, its highest since 2009. Does it offer any relief for sterling? GBPUSD has been crushed by the dollar steamroller – a hawkish BoE could help ease the pain. Markets are already pricing for the Bank to raise rates to 2.5% by this time next year. The risk for sterling bulls right now is that the BoE disappoints like it has in the past. However we might already be at the peak of central bank divergence thinking that has driven the dollar to multi-year highs.

Reserve Bank of Australia 

The RBA has been sliding gently into a position to tighten policy over the last few months and it could be ready to surprise the market with a rate hike this week. Unemployment has fallen to a record low 4% and inflation in the first quarter has ballooned to 5.1%. Key wage data – which needs to be at 3% inflation – is not released until after the meeting, but the RBA might not wait. Whether it hikes or not, relief for the AUD is likely to be limited due to the situation in China and broad weak macro environment. 

Earnings Season 

Major economic data