Well, the Fed policy is due on the 20th of September, the FOMC outcome is likely to come out a day from now. 99% of the participants expect a pause and then probably a possible hike in the month of November, 33% participants feel that. What do you think will be the roadmap ahead for the Fed? Is the Fed really going to be more data dependent going forward?
Look, our view is that there will be a pause. We are not expecting a subsequent hike, but that is our view. I think the Fed, as you say, is data dependent. They are on hold because inflation is coming down. Growth is holding up reasonably well, although there are clear signs of slowing. The labour market is a little softer than had been thought previously, although it is by no means loose. It is still fairly tight and the economy generally seems to be fairly resilient. Those are all reasons why the Fed is going to remain on hold and wait to see how the data evolves, how the economy evolves.
They are not in a position to give forward guidance because we are in many ways such uncharted territory. We have a fairly low unemployment rate below what had been anybody’s estimate of the kind of the natural rate of unemployment and we have a big budget deficit because of various fiscal programmes including subsidies for the industrial sector.
So, I think if you put all of that together, we are on a kind of let us see what happens kind of mode, sort of steady goes but let us be prepared to react when it becomes very clear that the economy is either still too strong or actually continuing to soften and headline inflation is coming down significantly.
I do not think we are going to get a very clear indication of that for a little while, hence the idea that we are on a kind of extended pause in this kind of bumpy landing that we are going through.
But one cannot deny the fact that the Fed really uses its commentary as a tool more than the rate hikes. Can we expect a more dovish stance now or will we expect a pause with a hawkish stance from the Fed?
I think we should expect a pause with a kind of neutral stance. In the sense that I think you still have some members of the committee that are more dovish and some members that are more hawkish and Powell perhaps leaning slightly more hawkish but less and less so with each passing meeting and, of course, this September meeting is important one because one of the quarterly ones where we will get projections, so-called dot plot and there I think we will obviously see the range within the committee without knowing the names of the individual dots.
I think when you sort of put all of that through the mill, what you will get is a kind of a neutral stance, sort of as you were saying more or less fully data dependent rather than the committee as a whole leaning one way or the other, because we are sort of at the peak of rates. We are maybe in a plateau on rates and we are sort of in the late cycle but not towards the end of the cycle yet or at least we cannot be sure. It makes sense to pause.
You have already answered my question on the dot plot, but do you think that the Fed will have to give up its 2% inflation target? What is going to be the trajectory for the Fed? How are the metrics going to change and when can we expect the rate cuts to come in?
Look, they are not going to give up on the 2% inflation target, at least not verbally. And I think in practice, they are going to continue to try to keep policy tight enough to keep us heading down towards the 2% inflation target. I would agree with a lot of people that, although it is probably not yet a full consensus, that it is a harder world for central banks including the Fed because we have a strong fiscal policy.
We have a lot of stuff going on the supply side because of fiscal policy, because of geopolitics, still to some extent because of the war constraints, reductions in production and exports of oil which are driving up the oil price, which is going to have some impact at least on headline inflation. All of these factors, some of them often there, some of them quite new, at least for several decades.
This sort of points to a tougher world for central banking and for investment banks and market participants like ourselves. So, we are not going to get a great deal of clarity and I do not think we are going to get any suggestion that in this environment where it might be harder to hit the inflation target, that we are actually going to give up on the inflation target by any means. We will still be heading in that direction and no real acknowledgement of how hard it is to hit that on a sustained basis.
Finally, you did mention, you did hit upon the topic of the rising oil prices. Now, oil has rebounded with Brent crude topping with $93 a barrel for the first time this year and oil market reports suggest that tighter supply and higher prices through the rest of the year and beyond how these have really fuelled the inflation fear, the headline inflation is likely to go up because of that. Now, oil prices are likely to remain elevated. We also see the bond yields inching up. What is going to be the impact on the inflation outlook and therefore on the markets?
Well, headline inflation is probably going to suffer some upward pressure in the US and in Europe and Japan and probably in India too to some extent, although in India, of course, there is more support for oil and other kinds of commodities than in the West.
Headline inflation is probably going to be under some upward pressure. Really, the focus now is more on core. There may be some degree of pass through from the rising headline due to oil or rather energy prices into core but that is also a reason to keep policy relatively restrictive to ensure that it does not really get embedded and lead to somewhat more of a spiral.
I do not think we really have a spiral at the moment. We have had some pass through, like I say, and they are going to try to limit that pass through so that it does not become embedded.
People do not expect higher inflation, keep demanding higher wages, that is more of a problem, perhaps, in the United Kingdom than in the United States, where there is really no evidence of a price-wage spiral, let alone a wage-price spiral.
There have been a lot of adjustments into relative prices, including energy. But it is coming under control now. So, they are going to react to the higher oil price by thinking, okay, well, this is another reason to stay on hold with a relatively restrictive policy and see how things evolve.