Fed's hawkish turn

0:00Today, the Fed gives markets confidence, it's willing to take on inflation, but it's not clear how far policy makers will go. Plus, rising energy prices raise the pressure on the Bank of England. And in Japan, the yen weekends, leaving markets to expect rates there to hit their highest in three decades. This is Reuters Morning Bid, bringing you unfiltered market news and analysis straight from the Reuters newsroom. I'm Peter Devlin and London. I'm Elena Casas, since Thursday, September 17th. So Peter, we're going on a world tour of central banks today, but we have the stars in DC. After Kevin Walsh's first meeting as Fed Chairman, markets were left a bit concerned about his credibility and the independence of the Fed. Now the Federal Reserve has delivered the rate rise that markets were expecting, and it was emphatic, it was unanimous from policy makers, and most of them expect to go further this year, according to their own predictions, a dozen policy makers see another rate rise this year. Four of them see two, only two of them think that the Fed is one and done for the year.

1:01So with this hawkish tone of markets worries about credibility, been put to bed. Well, the first rate rise in over three years, and it definitely doesn't feel like the last does it, or should have framed this hike as insurance against energy shocks, feeding into wider and broader inflation. It was very still stressing that a policy isn't restrictive, but I mean, he still said there's a lot of work more to do. In fact, he said that the plain fact is that inflation is too high, and that has been a too high for too long. So I mean, I think markets are taking this as a welcome sign, a bit of independence for the Fed, as we're willing to tackle and bite inflation at that high. I mean, we see bond traders bringing yields back down to 5% under 5% on the 10-year yields. Also, exactly as you said, giving a bit of credibility as Kevin Morris' Fed chair. The yield curve, as you said, has flattened out overnight. So that's obviously what traders wanted to hear. Of course, it's absolutely not what President Trump wanted to hear. We know he wants lower rates, and he was quick to react yesterday. But it's interesting that he said it was the Fed committee that was hostile. So he didn't personally condemn Kevin Morris, did he? He sort of allowed him to stand behind the rest of the committee members.

2:04Most of him were not appointed by Trump, of course, and which included Lisa Kirk, who he's been trying to fire. And he did sort of put the blame on the others, didn't he? And so that Worsh is dealing with a hostile committee. Well, when have we seen the FOMC this unified as well, as you said, on the Dobplot 16 of 18, see another hike this year, even if we look at the summary of economic projections, the first time ever since it's been published, zero members see downside risks to grow. So it definitely feels like the Fed can see more hugs coming and the economy can absorb them. And I think that really sees where we're going next. Obviously, we have big stress tests coming the next Fed meeting days before the crucial midterm elections. It's all just down to patients and it can they keep looking at inflation or do they can they wait till December? Who knows? Well, inflation certainly gave Kevin Morris cover, if you like, politically to raise rates yesterday. It's really interesting to see if that plays out in the same way as you said the next meeting that's just days before the midterms, where at the moment the market sees the odds of a hike and more or less 50, 50, a lot of that of course will come down to energy prices and just how much further they rise because of the war in Iran between now and then.

3:07And of course, that's a global problem. It's pulling pressure intensely on the Bank of England, which sets rates today. No one expects policymakers to move today, but Britain's dependence on imported energy means they've got a difficult problem ahead of them, don't they? So if you think back even to the last meeting at Bank of England governor, Andrew Billy, was quite unusually frank, he said, please don't leave this room thinking that the Bank of England is going to hike. And I don't think he can deliver that message quite emphatically today. I mean, looking at price pressures are coming fast and quick from the unresolved conflict in the Middle East as well. Further price pressures coming from a drought in a Nino that's going to push up food prices as well as air for prices they're expected to rise all threatening to keep them inflation above the Bank of England's 2% goal. So it definitely feels that we're going to see a hawker short from the Bank of England. 6-3 vote expected. I think the panel is going to be talking tough on inflation. What's interesting here is the gulf between what the market is expecting and what economists and policymakers themselves are saying. The market sees an 80% chance the bank is forced to hike in November.

4:07But as you say, Bailey and other policymakers have made it clear they don't want to, that if it's possible, they'd like to try and avoid it, even though the inflation pressure is building up. It'll also be interesting to see whether the bank pauses its own sales of longer-dated gills. The 20 and 30 years really come under pressure in recent weeks. We've seen big selling and it would give the government a chance to la John Healy significantly more headroom. If the bank starts to pause some of those sales because it's costing the government significant money and as Healy starts to try and calculate his budget ahead of October 28th, then every penny counts. Well, the Bank of England is going to say that politics is doing factor into the thinking. But obviously it's very clear on their mind. But going back to the point you said about the divergence of rate expectations and what the bank are going to do. Even just looking to inflation this week it rose for a second straight month. But there's really no examples or signs that that energy shock is feeding broadly into inflation. Inflation reading is still coming in line fairly predictable. And I think that's the thing to watch. There's no real signs of a hawkish shift yet. It's going to be the data points coming up next, isn't it?

5:09It's going to see if it can push headline inflation to 4%. That's what the bank of England is going to be watching. We have to talk also about the pressure mounting on policy makers over in Japan as we complete our world tour there. The US rate rise means the yen has fallen further this morning, which is increasing that pressure. It's undoing some of the work that US Treasury Secretary Scott percent tried to do over the summer when he backed up the yen. Policy makers are expected to hike again there, but how far are they expected to go? Well, there's a lot of pressure in the bank of Japan here. As you said, you've got pressure from US Secretary Bot Scott percent as well. The chronic weakness in the yen and prices that just keep going higher. So yes, they need to as expected deliver a hike today. I mean, that would be its third hike in less than 10 months. We haven't seen that fast at peace since 1990s. And back then, we saw four hikes in less than a year and that really bought the Japanese stock market to its knees. So I think that really shows the delicate balance that they have to play today. They have to hike, but they also have to deliver a four full message, not to undo the work they've seen that so far. It's interesting, isn't it? The NBA policy makers have actually suggested going further.

6:11They've suggested delivering half a point on Friday morning. And of course, a quarter point is expected. So it is a tricky balancing act, doesn't it? Well, Cornflation at 1.8 percent doesn't seem that and see and I'm really screaming out for a hike, especially when we talk about the inflation rates in the US and the UK earlier. But I mean, it really comes down from subsidies from a sanai-taki-eachies government pushing down that inflation level. And economists worried that that's going to hit 3 percent by the end of the year due to that prolonged weakness in the yen. So we can sort of see that percent maybe is talking too much about the bank of Japan, but maybe he's right that they are behind the curve and there's plenty of examples to see that they would come forward with more rate hikes possibly even in December. Well, he's the house, of course, don't bet against him. Looking for more investing options? Meet SIBO, the exchange that pioneered options trading. With exclusive trading products like VIX and SPX options, SIBO can help you trade in any market environment. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers.

7:14For today's recommended read, check out Marty Freedson's column on why bulls have an edge in the AI bubble to bits. The link is in the show notes. And for more on any of today's stories, head to roitus.com or the roitus app. Follow us on your favourite podcast player and if you're on a smart speaker, just ask for the latest marketing news from Reuters. We'll be back tomorrow.