Weekly outlook: Bank of England and US Federal Reserve interest rate decisions loom

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11 March 2022

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Portfolio Adviser

Monday 14 March

– Full-year results from Bodycote
– First-half results from Craneware
– German wholesale inflation
– In Asia, quarterly results from Meituan and Prada

Tuesday 15 March

– Full-year results from Informa, Ultra Electronics and TI Fluid Systems
– Chinese retail sales, industrial production and tangible fixed asset investment growth
– UK unemployment and wage growth
– German ZEW economic survey
– US producer price inflation
– In Europe, quarterly results from Volkswagen and RWE

Wednesday 16 March

– Full-year results from Fever-Tree Drinks, Wagamama-owner Restaurant Group, IP Group, Gym Group, CLS Holdings and gold miner Centamin
– US Federal Reserve interest rate decision
– US retail sales
– US oil inventories data
– US NAHB housebuilding industry survey
– In Asia, quarterly results from Apple supplier Hon Hai Precision
– In Europe, quarterly results from BMW and E.On
– In the US, quarterly results from Pinduoduo and Jabil

Against such a challenging and tragic macro-economic backdrop, AJ Bell investment director Russ Mould and financial analyst Danni Hewson said, “from the narrow perspective of financial markets” the worry is where “commodity price rises both stoke inflation and also hit economic activity”.

“Such concerns can only serve to put an even brighter spotlight on policy meetings at two major Western central banks this week – the US Federal Reserve on Wednesday 16 March and then the Bank of England on Thursday 17 March.

“How much influence their interest rate and quantitative easing policies can have right now is a moot point – neither monetary authority can print oil, or gas or aluminium or copper.”

Mould and Hewson added: “In addition, inflation that stands at a 30-year high and a 40-year peak in the US of 7.5% mean that interest rate cuts or more QE or both are not really viable options this time around, even if they have been the standard tools of policymakers during every bout of financial market upset dating all the way back to the Russian debt default and collapse of the LTCM hedge fund in 1998.”

They said those figures suggest rate rises “are the order of the day, to rein in inflation and stop it eating away at consumers’ and corporations’ real-terms earnings and thus their ability and willingness to spend or hire and invest”.

“But worries that high fuel and energy and raw material prices could hit the global economy just as they did in 2008 mean that central bankers could find themselves between a rock and hard place and having to choose between letting inflation damage the economy on one hand or higher interest rates dampen activity on the other.

“There will be some who argue that the Fed and Bank of England have brought this upon themselves by leaving interest rates too low for too long but there remains a risk that chair Jay Powell and the Bank of England governor find themselves boxed in.”

James McCann, deputy chief economist at Abrdn, added: “The Fed’s job is not getting any easier. Russia’s invasion of Ukraine has sparked market turmoil and sent commodity prices soaring, both of which present headwinds to the economy. However, higher energy and food prices will also exacerbate an already deeply uncomfortable inflation backdrop, and the Fed is unlikely to tell markets that it can slow its plans for policy tightening in the face of the worsening outlook.

“Indeed, its updated dot plot – showing the median interest rate view on the FOMC – is expected to pencil in hikes in almost every meeting this year, and a peak in the Fed Funds rate above 2%. Chair Powell might soften this message slightly, by telling markets that the Fed will be nimble around a fast evolving growth and inflation environment. But the underlying message is likely to be that bringing inflation under control is the Fed’s primary focus, even if that proves disruptive for markets and activity.”