The Fed, the Bank of England, and the Bank of Japan all left interest rates unchanged, but that does not mean the meetings had nothing to offer.
Starting with the Fed, the key takeaway wasn’t that it kept rates at 3.5-3.75% as inflation eased in June, with headline inflation falling 0.1% month-on-month and the annual rate to 3.7% from 4.1%, but that three members voted for a rate hike, showing pressure inside the central bank is building. And this is not the best news for the S&P 500, Nasdaq, or Dow Jones.
Looking ahead to September, markets are pricing in more than a 60% chance of a rate hike as inflation risks persist, driven by high energy prices, the unresolved Middle East conflict, and tariff wars back on the table. As for the Fed’s outlook, Kevin Warsh has not provided forecasts, although he said the central bank does not have a magic ability to bring inflation down quickly.
Similar story with the Bank of England: three of nine members voted for a 25-basis-point hike, up from two at the previous meeting, suggesting uncertainty remains. Now, taking into account that its more moderate inflation outlook compared with April relies on lower oil and gas prices, which has yet to happen, the possibility of another rate hike remains alive.
Finally, the Bank of Japan also kept rates at 1%, but warned that core inflation could exceed its target, leaving the door open to future hikes. The problem is that its room to raise rates is limited and unlikely to fully offset inflation risks or support the USD/JPY pair.
That’s why the regulator sold $58.97 billion in its latest attempt to support the yen. Together with the U.S. Treasury, which had the Federal Reserve Bank of New York sell euros to buy yen on its behalf, the currency moved back toward 157 per dollar. But once again, this could provide only temporary relief, as the fundamentals, including higher Fed rates, have not changed.
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