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Federal Reserve Update We expect FOMC to raise rates in 3Q11 We have pushed back our baseline forecast for the first Fed funds rate hike to 3Q11 from 1Q11. Recent economic trends confirm substantial economic slack remains and the pace of growth is going to ease in the second half of the year. While the labor market is improving, the tempo is not sufficient to result in a marked improvement in the unemployment rate. In addition, inflation expectations are well anchored and core inflation is

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The Bank of Canada just released its July Monetary Policy Report. Growth in Canada has been revised down from 3.7% to 3.5% in 2010 and from 3.1% to 2.9% in 2011. Although there is less excess capacity than expected in the economy in the short run, the closing of the output gap has been pushed back by six months, to the end of 2011. The historical average for the real official rate, over the period where inflation has been well anchored, is +160 basis points. Markets are now pricing a real

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Semi-Annual Monetary Policy Report Moderate growth, but risks are weighted to the downside Heightened uncertainty in the economic outlook due to the global financial situation Inflation forecast remains low and positive, with risks balanced Economic outlook supports low rates for a prolonged period Moderate growth, a gradual decline in the unemployment rate and subdued inflation Bernanke’s remarks in his Semi-Annual Monetary Policy Report before Congress echoed soundings from the most recent

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Expected to show a vote of 7-1 to keep interest rates at 0.5%, with Sentance voting for a hike of 0.25bps Unanimous vote expected to keep the QE program unchanged at GBP200bln Today's minutes are unlikely to be too dissimilar from the previous month’s statement; however, this time round it is likely that the MPC would have paid more attention to the inflation level which remains stubbornly above the Banks' mandated level of 2%. As such, given the recent comments from Sentance, most expect that

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The Bank of Canada, as expected, hiked rates by a quarter point to 0.75% in today’s meeting. The accompanying release, while saying economic activity in Canada was unfolding largely as expected, did cut its forecasts for growth in 2010 and 2011. Growth in 2010 is now forecast at 3.5% from 3.7%, while the forecast for 2011 was revised to 2.9% from 3.1%. “This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada.� From the Release:

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As expected, the Bank of Canada (BoC) raised its overnight rate by 25 basis points, to 0.75%. Despite the move, the Bank adopted a more cautious tone about its outlook for growth. While recognizing that the global economy is proceeding, the BoC sees the policy response to the European sovereign debt crisis as a drag on growth. As a result, the Canadian economy is now expected to grow 3.5% in 2010 (down from 3.7%) and 2.9% in 2011 (down from 3.1%). These revisions imply that the economy will now

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As expected, Monetary Policy Council of the Central Bank left rates at 5.25% at today's rate setting meeting. The statement of the Monetary Council will be published and the Governor's press conference will start at 3 p.m.

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Economic and inflation outlook downgraded pr imarily due to less supportive financial conditions It will take a significant further deterioration in the economic outlook before the Fed will engage in additional QE Status quo on asset sales – they will begin after the first Fed funds rate hike Details The FOMC minutes from the 22-23 June meeting included the members’ new economic projections. GDP growth was lowered for 2010 and 2011 but remains above trend (see table at the right). This

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This morning’s job report in Canada was very impressive. Not only did the Canadian job machine create 93K jobs in June, but the level of total employment reached its pre-recession peak. This is much more robust than its U.S. counterpart whose payroll remains 5.4% below its peak level. This shows a big cyclical difference between the current state of the Canadian labour market and the one in the U.S. What does this mean for monetary policy? Canada can no longer simply import U.S. monetary

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In a relatively uneventful Q&A, the main novelty was Trichet’s call for flexibility in the use of the EFSF (to recapitalize banks) As expected, the ECB does not seem to oppose the small rise of Eonia that followed the effective withdrawal of liquidity, and clarified it implies no message for policy stance The ECB is still reluctant to show further commitment to its bond purchase program The ECB statement was very similar to the one last month. The issue of liquidity, which was expected to

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European Central Bank (ECB) President Jean-Claude Trichet, in his press conference following the central bank’s monthly meeting, built on the more confident tone set in recent weeks. Mr. Trichet suggested improved market conditions are a reflection of the decisive and constructive actions taken by eurozone governments. Quizzed on why interbank lending rates have gone up as of recent, Trichet stated the move is a rational market reaction as a total of €244 billion in liquidity has been

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Trichet seemed slightly more positive today than at previous press conferences. He did not introduce any new non-standard measures and did not express concern about the latest market developments. In a gesture of confidence, he said that market observers have been too pessimistic on the capacity of EU authorities to take necessary decisions. Trichet noted that the need for intervention in the government bond market has been diminishing and that it looks like a trend. Sterilisation will

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ECB: Today ECB’s Trichet is expected to say that rates remain appropriate at 1.00% and that the inflation outlook remains well anchored. As usual, Trichet will be provided with an opportunity to discuss pertinent issues, such as the expiration of the 12-month LTRO, EU stress tests and also update market participants on the bond buying program. However he will repeat his message that the ECB has not changed its stance regarding monetary policy and that the bond buying program will not undermine

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...No new decisions are expected from the ECB at its last meeting before the holidays... Trichet might choose to be as boring as possible to avoid more volatility... ...by downplaying risks of a renewed downturn of the economy and... ...by showing satisfaction about the successful liquidity operations of late. Main task: avoid volatility and uncertainty... Last month’s ECB meeting turned out extremely interestingly. The new ECB staff projections and the latest preparations ahead of the

FXstreet.com: Fundamental: Reports on Interest Rates
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The July 8 ECB meeting should bring very little changes in the central bank’s assessment of the GDP/CPI outlook. The current rates level, therefore, remains appropriate. Trichet will probably welcome the results of the recent 3M and 6D auctions, and stress that excess liquidity remains high enough to keep the EONIA rate well below the refi. Stress tests will be an important part of the Q&A session. The critical points are homogeneity across countries, the inclusion of periphery stress, the

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The ECB’s 12-month long-term refinancing operation (LTRO) conducted in June 2009 expired today, and this reduces the liquidity position by EUR442bn. The expiry is financed by two new ECB operations. Yesterday, EUR132bn was allocated in the three-month LTRO, and today EUR111bn was allocated in a six-day fine-tuning operation. The total roll is therefore EUR243bn and this reduces the overall excess liquidity by around EUR200bn. The total roll is close to the expected EUR250-300bn. However, the

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The Bank of England minutes surprised in that one policy maker, Andrew Sentence, voted to raise the benchmark interest rate to 0.75%, while the other 7 members voted to hold the rate at 0.5%. Sentence favored an increase as he argued that inflation poses a problem due to its resilience. It’s the first call for an interest rate increase in almost two years. Last week, BOE Governor Mervyn King stressed that the UK economy does not show the traits associated with continuously rising prices and

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In a speech in Asia, Bernanke laid out some of his thoughts on the economy as on monetary policy. Key highlights from his speech included: The recovery is “moderate paced.� “There seems to be a good bit of momentum in consumer spending and investment. My best guess is we’ll have a continued recovery [but] it won’t feel terrific.� In other words, there will not be a double-dip recession. Fed will raise interest rates before the economy returns to “full employment.� Unemployment rate will remain

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The Reserve Bank of Australia held rates steady at 4.5%, its first pause in increasing rates since February. Since October of last year, the bank has upped its benchmark rate six times totaling 1.5% or 150 basis points. In its statement the bank said that those rate hikes represent a significant adjustment to monetary policy, but they did leave the prospect of a return from the sidelines within a short period of time saying policy is appropriate only for the “near-term.� While the Euro-zone

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Recent data reflects moderate economic recovery and strengthening labor markets Primary challenges lie in personal consumption and residential real estate Official interest rates remain unchanged at 0%-0.25% FOMC members agreed that the economy is strengthening and the labor market is starting to improve in line with their expectation of moderate growth. In fact, at this meeting, participants submitted projections for economic growth. The average of the central tendency moved up to 3.5% in

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According to the Department of Treasury’s Auction Staff, the U.S. auctioned $8.8 trillion in Bills, Notes and Bonds in fiscal year 2009. That number is greater than the entire publicly traded debt, which is currently $8.4 trillion. The reason for the enormous amount of debt issuance is due to our surging annual deficits and rollovers that must occur more frequently because of the government’s decision to issue debt on the short end of the yield curve. The astronomical size of debt the Treasury

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The RBA hiked its interest rate by another 25 basis points to 4.5% in Tuesday’s Asian session. It was the sixth increase in the benchmark interest rate in the past seven meetings, but in the statement the RBA said that rates should now be “around average levels.� From the Statement : “With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being

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The Fed maintained the federal funds rate at 0-0.25% Improvement was cited in the labor market and consumer spending No change to the inflation outlook or current monetary policy The FOMC believes that the economy strengthened in the intermeeting period, which is in line with outlooks described by the regional Presidents in recent speeches. While the previous statement described the labor market as “stabilizing,� today’s release highlighted that it is “beginning to improve.� The statement

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In its statement today following the conclusion of its interest rate meeting, the FOMC upgraded its assessment of the economy slightly while maintaining that the recovery is fragile enough that the Fed needs to keep its interest rates at their low levels for an extended period of time. The Fed said that economic activity “has continued to strengthen� and “that the labor market is beginning to improve.� That was better than the language used about the labor market in the previous meeting on

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In today’s statement following the conclusion of its interest rate decision meeting the Bank of Canada announced that it will maintain its overnight rate target at 0.25%, but that it would remove its conditional commitment to keep rates at that level until the end of the 2nd quarter. Dropping that commitment will fuel speculation that the Bank is ready to begin tightening rates and may do so in its next meeting on June 1st. The Bank increased its projections for growth, now saying that the

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Economic data point to a moderate pace of recovery Primary concerns lie in employment and real estate Exit strategy will be dictated by economic and financial developments In the most recent FOMC meeting, participants concluded that recent data “confirmed that the economic recovery was likely to proceed at a moderate pace.� Furthermore, they believe that the financial market conditions continued to support economic growth. Nevertheless, their overall assessment remained cautious and

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In testimony today’ Fed Chairman Bernanke said that the Fed will begin monetary tightening when the economy improves, but that the sequencing of the actions has not yet been decided. However, the Fed will move before there is a full scale recovery. “We will not be able to wait until things are back to normal� before starting to raise rates, but that the Fed will “make sure the economy is on a sustainable growth path� before they will act. Bernanke said that the Fed takes both sides of its dual

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The Swiss Franc continued to gain on the Euro in Wednesday’s trading, extending a week of very strong gains already. The EUR/CHF pair, which has been sticking to very tight trading ranges recently has seen a sharp increase in volatility once it managed to break below the 1.46 level and in the wake of the Swiss National Bank interest rate meeting. SNB Upgrades Outlook And Says Will Act to Prevent Appreciation of Franc Last Thursday, the Swiss National Bank concluded its meeting where it

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Fed funds rate remained at 0-0.25% Outlook for the labor market and business spending improved FOMC will follow the previously announced schedule to winddown remaining liquidity support programs Changes to the statement from today’s FOMC meeting reflect a more positive economic outlook. One of the most significant changes was the view of the labor market. The statement stated that, “the labor market is stabilizing,� rather than, “deterioration in the labor market is abating.� Furthermore, in

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Given that the ECB has announced that it will keep full allotment in place at its weekly main refinancing operations and at its 1-month auctions until October we think that a hike in November 2010 is too early and we thus move our projection of a first hike to Q1 2011. The ECB is heading towards the exit at a slow pace The ECB announced last Thursday at the ECB Governing Council meeting that the 3-month auctions will be with fixed allotment from now on (see ECB meeting: A slow normalisation ).

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The ECB is in the middle of a tough balancing act as it is attempting to lay the groundwork for mopping up extra liquidity in the banking system while still maintaining favorable lending conditions and dealing with the fallout from the Greece debt situation. Some Steps to Tighten Monetary Policy “The Eurosystem continues to provide liquidity support to the banking system of the euro area at very favorable conditions,� Trichet said. It will still lend as much money as needed through its

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The ECB’s weekly main refinancing operations and the one-month auctions will continue to be with full allotment at least until 12 October 2010. That the ECB promised to give full allotment for such a long period was today’s big surprise. For the three-month auctions the ECB is moving to fixed allotment. The last 6-month auction will be at a rate indexed to the refinancing rate. This will not matter much though, as the refinancing rate is expected to remain unchanged for at least 6 months. The

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The timing of the exit strategy will be determined to economic and financial developments Economic slack, subdued inflation trends and stable inflation expectations support maintaining low rates for a prolonged period The Fed remains committed to transparency, but will ensure that monetary policy remains insulated from political pressures Bernanke reinforced the message that rates will stay low for an extended period in today’s semiannual report to Congress. While his comments on the economic

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In testimony before the House Financial Services Committee Fed Chairman Bernanke told legislators that the economic recovery is not yet on a sustainable path, and that the Fed’s near zero interest rates are still needed. The Fed sees the economy expanding between 3.0% and 3.5% this year and between 3.5% and 4.5% in 2011, but Bernanke noted that the strong growth in the latter half of 2009 was fueled by temporary factors and that the unemployment rate is seen falling only slowly, to around 7%

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The Pound came under pressure overnight following testimony by Bank of England Governor Mervyn King in which he said the UK economy faces a new threat: the risk of a weaker-than-expected recovery in the Euro-zone. The BOE had factored in higher exports and an increase in net trade as domestic demand faltered, mainly on the back of a weaker Pound. However those gains have not materialized, though King expected then to “in due course.� One problem is that, according to King, the Euro-zone

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Downside risks to recovery have diminished “a bit further� Labor market weakness remains a major concern Target rate will remain at 0%-0.25% for an extended period FOMC participants’ economic outlook remains unchanged from the previous meeting. They believe that recent economic data is, “in line with the expectations for moderate growth and subdued inflation in 2010 that they held when the Committee met in mid-December.� Furthermore, financial conditions continue to support economic growth. In

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In testimony before the House Financial Services Committee, Bernankesaid that the outlook for monetary policy has not changed since theFOMC January meeting, and reiterated that low rates are warranted “foran extended period.� Bernanke said “�the economy continues to requirethe support of accommodative monetary policies. However, we have beenworking to ensure that we have the tools to reverse, at the appropriatetime, the currently very high degree of monetary stimulus.� Fed Targets

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The interest rate on reserves could replace the fed funds rate as the primary monetary policy tool until conditions normalize The timeline will be dictated by economic and financial developments Bernanke outlined the tools available to the Federal Reserve to manage interest rates and reduce the large quantity of reserves held by the banking system in a testimony before the House Committee on Financial Services. Bernanke addressed the possibility of communicating monetary policy through the

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Economic and financial conditions improve Fed maintains its outlook of low inflation In this environment, Fed funds are likely to remain low for a prolonged period As in previous statements, FOMC members consider that “economic activity is likely to remain weak for a time�. However, Fed continues to improve its assessment on the economic outlook and made three major changes to the economic activity paragraph in its latest statement. The first one indicates that “Financial market conditions

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Economic growth is sustainable; labor market remains a risk Inflation will remain subdued in the near term Target rate will remain at 0%-0.25% for an extended period FOMC participants expect economic growth to continue into the fourth quarter. Better than expected spending and production data prompted an upward revision of the staff’s forecast for 4Q09 growth, but 2010 and 2011 projections remained unchanged. Better alignment of business inventories with sales, growth in consumer spending