A 'momentous week' ahead as the Fed, ECB and Bank of Japan near pivot point

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Elliot Smith

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The market is pricing 25 basis point hikes for the Federal Reserve and the European Central Bank, but economists will be closely scrutinizing communications on their future rate paths.

The Bank of Japan faces a different challenge, and is expected to keep its -0.1% short-term interest rate target despite inflation consistently exceeding target and signs of the economy heating up.

In this article

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The U.S. Federal Reserve , Bank of Japan and European Central Bank will all announce key interest rate decisions this week, with each potentially nearing a pivotal moment in their monetary policy trajectory.

As Goldman Sachs strategist Michael Cahill put it in an email Sunday, "This should be a momentous week."

"The Fed is expected to deliver what could be the last hike of a cycle that has been one for the books. The ECB will likely signal that it is coming close to the end of its own cycle out of negative rates, which is a big 'mission accomplished' in its own right," Cahill, a G10 FX strategist, said.

"But as they are coming to a close, the BoJ could out-do them all by finally getting out of the starting blocks."

The Fed

Each central bank faces a very different challenge. The Fed, which concludes its monetary policy meeting on Wednesday, last month paused its run of 10 consecutive interest rate hikes as it waited to see where inflation was headed.

The subsequent figures for June showed that consumer price inflation stateside fell to its lowest annual rate in more than two years, but the core CPI rate , which strips out volatile food and energy prices, was still up 4.8% year on year and 0.2% on the month.

Policymakers reiterated their commitment to bringing inflation down to the central bank's 2% target, and the latest data flow has reinforced the impression that the U.S. economy is proving resilient.

watch now

VIDEO

3:28

03:28

Squawk Box Asia

The market is all but certain that the Federal Open Market Committee will opt for a 25 basis point hike on Wednesday, taking the target fed funds rate to between 5.25% and 5.5%, according to the CME Group FedWatch tool.

Yet with inflation and the labor market now cooling consistently, Wednesday's expected hike could mark the end of a 16-month run of almost constant monetary policy tightening.

"The Fed has communicated its willingness to raise rates again if necessary, but the July rate hike could be the last — as markets currently expect — if labor market and inflation data for July and August provide additional evidence that wage and inflationary pressures have now subsided to levels consistent with the Fed's target," economists at Moody's Investors Service said in a research note last week.

"The FOMC will, however, maintain a tight monetary policy stance to aid continued softening in demand and consequently, inflation."

watch now

VIDEO

2:06

02:06

Capital Connection

This was echoed by Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered, who said the debate going forward will be over the guidance that the Fed issues. Several analysts over the past week have suggested that policymakers will remain "data dependent," but push back against any talk of interest rate cuts in the near future.

"There is a good case to be made that September should be a skip unless there is a significant upside inflation surprise, but the FOMC may be wary of giving even mildly dovish guidance," Englander said.

"In our view the FOMC is like a weather forecaster who sees a 30% chance of rain, but skews the forecast to rain because the fallout from an incorrect sunny forecast is seen as greater than from an incorrect rain forecast."

The ECB

Downside inflation surprises have also emerged in the euro zone of late, with June consumer price inflation across the bloc hitting 5.5% , its lowest point since January 2022. Yet core inflation remained stubbornly high at 5.4%, up slightly on the month, and both figures still vastly exceed the central bank's 2% target.

The ECB raised its main interest rate by 25 basis points in June to 3.5%, diverging from the Fed's pause and continuing a run of hikes that began in July 2022.

The market is pricing in a more than 99% chance of a further 25 basis point hike upon the conclusion of the ECB's policy meeting on Thursday, according to Refinitiv data, and key central bank figures have mirrored trans-Atlantic peers in maintaining a hawkish tone.

ECB Chief Economist Philip Lane last month warned markets against pricing in cuts to interest rates within the next two years.

With a quarter-point hike all but predetermined, as with the Fed, the key focus of Thursday's ECB announcement will be what the Governing Council indicates about the future path of policy rates, said BNP Paribas Chief European Economist Paul Hollingsworth.

watch now

VIDEO

5:19

05:19

Squawk Box Europe

"In contrast to June, when President Christine Lagarde said that 'it is very likely the case that we will continue to increase rates in July', we do not expect her to pre-commit the Council to another hike at September's meeting," Hollingsworth said in a note last week.

"After all, recent comments suggest no strong conviction even among the hawks for a September hike, let alone a broad consensus to signal its likelihood already this month."

Given this lack of an explicit direction, Hollingsworth said traders will be reading between the lines of the ECB's communication to try to establish a bias toward tightening, neutrality or a pause.

At its last meeting, the Governing Council said its "future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary."

watch now

VIDEO

3:34

03:34

Street Signs Europe

BNP Paribas expects this to remain unchanged, which Hollingsworth suggested represents an "implicit bias for more tightening" with "wiggle room" in case incoming inflation data disappoints.

"The message in the press conference could be more nuanced, however, suggesting that more might be needed, rather than that more is needed," he added.

"Lagarde could also choose to reduce the focus on September by pointing towards a possible Fed-style 'skip', which would leave open the possibility of hikes at subsequent meetings."

The Bank of Japan

Far from the discussion in the West about the last of the monetary tightening, the question in Japan is when its central bank will become the last of the monetary tighteners.

The Bank of Japan held its short-term interest rate target at -0.1% in June, having first adopted negative rates in 2016 in the hope of stimulating the world's third-largest economy out of a prolonged "stagflation," characterized by low inflation and sluggish growth. Policymakers also kept the central bank's yield curve control (YCC) policy unchanged.

Yet first-quarter growth in Japan was revised sharply higher to 2.7% last month while inflation has remained above the BOJ's 2% target for 15 straight months , coming in at 3.3% year on year in June. This has prompted some early speculation that the BOJ may be forced to finally begin reversing its ultra-loose monetary policy, but the market is still pricing no revisions to either rates or YCC in Friday's announcement.

watch now

VIDEO

2:35

02:35

Squawk Box Asia

Yield curve control is usually a temporary measure in which a central bank targets a longer-term interest rate, then buys or sells government bonds at a level necessary to hit that rate.

Under Japan's YCC policy, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero, with the aim of maintaining the inflation target at 2%.

Barclays noted Friday that Japan's output gap — the difference between actual and potential economic output — was still negative in the first quarter, while real wage growth remains in negative territory and the inflation outlook is uncertain. The British bank's economists expect a shift away from YCC at the central bank's October meeting, but said the vote split this week could be important.

"We think the Policy Board will reach a majority decision, with the vote split between relatively hawkish members emphasizing the need for YCC revision (Tamura, Takata) and more neutral members, including Governor Ueda, and dovish members (Adachi, Noguchi) in the reflationist camp," said Christian Keller, head of economics research at Barclays.

"We think this departure from a unanimous decision to maintain YCC could fuel market expectations for future policy revisions. In this context, the July post-MPM press conference and the summary of opinions released on 7 August will be particularly important."

Clarification: This story has been updated to clarify that the Fed last month paused its run of 10 consecutive interest rate hikes as it waited to see where inflation was headed.

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Skip Navigation. watch live. Markets. Pre-Markets. U.S. Markets. Currencies. Cryptocurrency. Futures & Commodities. Bonds. Funds & ETFs. Business. Economy. Finance. Health & Science. Media. Real Estate. Energy. Climate. Transportation. Industrials. Retail. Wealth. Life. Small Business. Investing. Personal Finance. Fintech. Financial Advisors. Options Action. ETF Street. Buffett Archive. Earnings. Trader Talk. Tech. Cybersecurity. Enterprise. Internet. Media. Mobile. Social Media. CNBC Disruptor 50. Tech Guide. Politics. White House. Policy. Defense. Congress. Equity and Opportunity. CNBC TV. Live TV. Live Audio. Business Day Shows. Entertainment Shows. Full Episodes. Latest Video. Top Video. CEO Interviews. CNBC Documentaries. CNBC Podcasts. CNBC World. Digital Originals. Live TV Schedule. Watchlist. Investing Club. Trust Portfolio. Analysis. Trade Alerts. Meeting Videos. Homestretch. Jim's Columns. Education. PRO. Pro News. Pro Live. Market Forecast. Subscribe. Sign In. Menu. Make It. select ALL SELECT Credit Cards Loans Banking Mortgages Insurance Credit Monitoring Personal Finance Small Business Taxes Help for Low Credit Scores Investing SELECT All Credit Cards Find the Credit Card for You Best Credit Cards Best Rewards Credit Cards Best Travel Credit Cards Best 0% APR Credit Cards Best Balance Transfer Credit Cards Best Cash Back Credit Cards Best Credit Card Welcome Bonuses Best Credit Cards to Build Credit SELECT All Loans Find the Best Personal Loan for You Best Personal Loans Best Debt Consolidation Loans Best Loans to Refinance Credit Card Debt Best Loans with Fast Funding Best Small Personal Loans Best Large Personal Loans Best Personal Loans to Apply Online Best Student Loan Refinance SELECT All Banking Find the Savings Account for You Best High Yield Savings Accounts Best Big Bank Savings Accounts Best Big Bank Checking Accounts Best No Fee Checking Accounts No Overdraft Fee Checking Accounts Best Checking Account Bonuses Best Money Market Accounts Best CDs Best Credit Unions SELECT All Mortgages Best Mortgages Best Mortgages for Small Down Payment Best Mortgages for No Down Payment Best Mortgages with No Origination Fee Best Mortgages for Average Credit Score Adjustable Rate Mortgages Affording a Mortgage SELECT All Insurance Best Life Insurance Best Homeowners Insurance Best Renters Insurance Best Car Insurance Travel Insurance SELECT All Credit Monitoring Best Credit Monitoring Services Best Identity Theft Protection How to Boost Your Credit Score Credit Repair Services SELECT All Personal Finance Best Budgeting Apps Best Expense Tracker Apps Best Money Transfer Apps Best Resale Apps and Sites Buy Now Pay Later (BNPL) Apps Best Debt Relief SELECT All Small Business Best Small Business Savings Accounts Best Small Business Checking Accounts Best Credit Cards for Small Business Best Small Business Loans Best Tax Software for Small Business SELECT All Taxes Best Tax Software Best Tax Software for Small Businesses Tax Refunds SELECT All Help for Low Credit Scores Best Credit Cards for Bad Credit Best Personal Loans for Bad Credit Best Debt Consolidation Loans for Bad Credit Personal Loans if You Don't Have Credit Best Credit Cards for Building Credit Personal Loans for 580 Credit Score or Lower Personal Loans for 670 Credit Score or Lower Best Mortgages for Bad Credit Best Hardship Loans How to Boost Your Credit Score SELECT All Investing Best IRA Accounts Best Roth IRA Accounts Best Investing Apps Best Free Stock Trading Platforms Best Robo-Advisors Index Funds Mutual Funds ETFs Bonds. USA. INTL. watch live. Search quotes, news & videos. Watchlist. SIGN IN. Create free account. Markets. Business. Investing. Tech. Politics. CNBC TV. Watchlist. Investing Club. PRO. Menu. Central Banks. Elliot Smith. @ElliotSmithCNBC. WATCH LIVE. The market is pricing 25 basis point hikes for the Federal Reserve and the European Central Bank, but economists will be closely scrutinizing communications on their future rate paths. The Bank of Japan faces a different challenge, and is expected to keep its -0.1% short-term interest rate target despite inflation consistently exceeding target and signs of the economy heating up. In this article. ECBK. Follow your favorite stocks CREATE FREE ACCOUNT. The U.S. Federal Reserve , Bank of Japan and European Central Bank will all announce key interest rate decisions this week, with each potentially nearing a pivotal moment in their monetary policy trajectory. As Goldman Sachs strategist Michael Cahill put it in an email Sunday, "This should be a momentous week." "The Fed is expected to deliver what could be the last hike of a cycle that has been one for the books. The ECB will likely signal that it is coming close to the end of its own cycle out of negative rates, which is a big 'mission accomplished' in its own right," Cahill, a G10 FX strategist, said. "But as they are coming to a close, the BoJ could out-do them all by finally getting out of the starting blocks." The Fed. Each central bank faces a very different challenge. The Fed, which concludes its monetary policy meeting on Wednesday, last month paused its run of 10 consecutive interest rate hikes as it waited to see where inflation was headed. The subsequent figures for June showed that consumer price inflation stateside fell to its lowest annual rate in more than two years, but the core CPI rate , which strips out volatile food and energy prices, was still up 4.8% year on year and 0.2% on the month. Policymakers reiterated their commitment to bringing inflation down to the central bank's 2% target, and the latest data flow has reinforced the impression that the U.S. economy is proving resilient. watch now. VIDEO. 3:28. 03:28. Squawk Box Asia. The market is all but certain that the Federal Open Market Committee will opt for a 25 basis point hike on Wednesday, taking the target fed funds rate to between 5.25% and 5.5%, according to the CME Group FedWatch tool. Yet with inflation and the labor market now cooling consistently, Wednesday's expected hike could mark the end of a 16-month run of almost constant monetary policy tightening. "The Fed has communicated its willingness to raise rates again if necessary, but the July rate hike could be the last — as markets currently expect — if labor market and inflation data for July and August provide additional evidence that wage and inflationary pressures have now subsided to levels consistent with the Fed's target," economists at Moody's Investors Service said in a research note last week. "The FOMC will, however, maintain a tight monetary policy stance to aid continued softening in demand and consequently, inflation." watch now. VIDEO. 2:06. 02:06. Capital Connection. This was echoed by Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered, who said the debate going forward will be over the guidance that the Fed issues. Several analysts over the past week have suggested that policymakers will remain "data dependent," but push back against any talk of interest rate cuts in the near future. "There is a good case to be made that September should be a skip unless there is a significant upside inflation surprise, but the FOMC may be wary of giving even mildly dovish guidance," Englander said. "In our view the FOMC is like a weather forecaster who sees a 30% chance of rain, but skews the forecast to rain because the fallout from an incorrect sunny forecast is seen as greater than from an incorrect rain forecast." The ECB. Downside inflation surprises have also emerged in the euro zone of late, with June consumer price inflation across the bloc hitting 5.5% , its lowest point since January 2022. Yet core inflation remained stubbornly high at 5.4%, up slightly on the month, and both figures still vastly exceed the central bank's 2% target. The ECB raised its main interest rate by 25 basis points in June to 3.5%, diverging from the Fed's pause and continuing a run of hikes that began in July 2022. The market is pricing in a more than 99% chance of a further 25 basis point hike upon the conclusion of the ECB's policy meeting on Thursday, according to Refinitiv data, and key central bank figures have mirrored trans-Atlantic peers in maintaining a hawkish tone. ECB Chief Economist Philip Lane last month warned markets against pricing in cuts to interest rates within the next two years. With a quarter-point hike all but predetermined, as with the Fed, the key focus of Thursday's ECB announcement will be what the Governing Council indicates about the future path of policy rates, said BNP Paribas Chief European Economist Paul Hollingsworth. watch now. VIDEO. 5:19. 05:19. Squawk Box Europe. "In contrast to June, when President Christine Lagarde said that 'it is very likely the case that we will continue to increase rates in July', we do not expect her to pre-commit the Council to another hike at September's meeting," Hollingsworth said in a note last week. "After all, recent comments suggest no strong conviction even among the hawks for a September hike, let alone a broad consensus to signal its likelihood already this month." Given this lack of an explicit direction, Hollingsworth said traders will be reading between the lines of the ECB's communication to try to establish a bias toward tightening, neutrality or a pause. At its last meeting, the Governing Council said its "future decisions will ensure that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary." watch now. VIDEO. 3:34. 03:34. Street Signs Europe. BNP Paribas expects this to remain unchanged, which Hollingsworth suggested represents an "implicit bias for more tightening" with "wiggle room" in case incoming inflation data disappoints. "The message in the press conference could be more nuanced, however, suggesting that more might be needed, rather than that more is needed," he added. "Lagarde could also choose to reduce the focus on September by pointing towards a possible Fed-style 'skip', which would leave open the possibility of hikes at subsequent meetings." The Bank of Japan. Far from the discussion in the West about the last of the monetary tightening, the question in Japan is when its central bank will become the last of the monetary tighteners. The Bank of Japan held its short-term interest rate target at -0.1% in June, having first adopted negative rates in 2016 in the hope of stimulating the world's third-largest economy out of a prolonged "stagflation," characterized by low inflation and sluggish growth. Policymakers also kept the central bank's yield curve control (YCC) policy unchanged. Yet first-quarter growth in Japan was revised sharply higher to 2.7% last month while inflation has remained above the BOJ's 2% target for 15 straight months , coming in at 3.3% year on year in June. This has prompted some early speculation that the BOJ may be forced to finally begin reversing its ultra-loose monetary policy, but the market is still pricing no revisions to either rates or YCC in Friday's announcement. watch now. VIDEO. 2:35. 02:35. Squawk Box Asia. Yield curve control is usually a temporary measure in which a central bank targets a longer-term interest rate, then buys or sells government bonds at a level necessary to hit that rate. Under Japan's YCC policy, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero, with the aim of maintaining the inflation target at 2%. Barclays noted Friday that Japan's output gap — the difference between actual and potential economic output — was still negative in the first quarter, while real wage growth remains in negative territory and the inflation outlook is uncertain. The British bank's economists expect a shift away from YCC at the central bank's October meeting, but said the vote split this week could be important. "We think the Policy Board will reach a majority decision, with the vote split between relatively hawkish members emphasizing the need for YCC revision (Tamura, Takata) and more neutral members, including Governor Ueda, and dovish members (Adachi, Noguchi) in the reflationist camp," said Christian Keller, head of economics research at Barclays. "We think this departure from a unanimous decision to maintain YCC could fuel market expectations for future policy revisions. In this context, the July post-MPM press conference and the summary of opinions released on 7 August will be particularly important." Clarification: This story has been updated to clarify that the Fed last month paused its run of 10 consecutive interest rate hikes as it waited to see where inflation was headed. Subscribe to CNBC PRO. Licensing & Reprints. CNBC Councils. Select Personal Finance. CNBC on Peacock. Join the CNBC Panel. Supply Chain Values. Select Shopping. Closed Captioning. Digital Products. News Releases. Internships. Corrections. About CNBC. Ad Choices. Site Map. Podcasts. Careers. Help. Contact. News Tips. Got a confidential news tip? We want to hear from you. Get In Touch. Advertise With Us. Please Contact Us. CNBC Newsletters. Sign up for free newsletters and get more CNBC delivered to your inbox. Sign Up Now. Get this delivered to your inbox, and more info about our products and services. Privacy Policy. |. Do Not Sell My Personal Information. |. CA Notice. |. Terms of Service. © 2023 CNBC LLC. All Rights Reserved. A Division of NBCUniversal. Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis. Market Data Terms of Use and Disclaimers. Data also provided by.