The First Week of November is All About Rate Hikes With Two of the ‘big Four Central Banks” Taking Front and Centre Stage
The Federal Reserve and the Bank of England are both expected to unleash yet more super-sized 75 basis-point rate hikes in the coming days in a show of aggression toward inflation, even in the face of mounting recession risks.
The transatlantic double act illustrates the trade-off confronting central banks as evidence of an impending global economic contraction becomes harder to ignore, even as inflation lingers.
For the Fed, the fourth such out-sized move on Wednesday will bring it to a crossroads. The damage to growth inflicted by policy tightening is no longer being masked by the buoyancy of the post-pandemic economy, while its success in taming inflation has yet to materialize.
The Bank of England’s situation on Thursday is even less comfortable as it delivers what would be the biggest UK interest rate hike since 1989. Not only is the country probably already in a recession, but officials are also trying to re-establish the credibility of the UK’s framework after former Prime Minister Liz Truss’s fiscal policies led to a disastrous financial crisis.
As traders very well know – every rate hike, big or small – especially from one of the “Big 4 Central Banks” has enormous potential to move the markets significantly and should not be underestimated!
In recent weeks, a long list of Wall Street banks and international organization from the United Nations, World Bank and IMF warned that an overly aggressive Fed tightening policy, combined with a surging U.S dollar – “risks breaking the financial markets and inflicting worse damage globally than the financial crisis in 2008 and the Covid-19 shock in 2020”.
According to Goldman Sachs, the Federal Reserve is now only “one or two rate hikes away” from unleashing a global financial meltdown.
Sooner or later the Fed will have no other option, but to pivot.
Those bets hardened last week after a conglomerate of Wall Street banks increased their wagers in favor of the Fed slowing the pace of its aggressive rate hikes in December. The big question now is –will this be the Fed’s last big hike, before policy makers are forced to do a U-turn on rates? Only time will tell.
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