Part V: The FOMC, Blue Chip or the New Framework: Predicting the Fed Funds Rate

Summary

• This installment presents a new framework to predict the level of the fed funds rate two quarters out.
• We compare our framework’s fed funds forecast with the FOMC and Blue Chip forecasts to decide who is more accurate at predicting the near-term fed funds rate.
• The framework effectively predicted the turning points in the fed funds rate in the simulation analysis.
• The FOMC started providing the SEP in 2012; therefore, we employ the 2012-2024 period to identify whose fed funds rate predictions are the most accurate.
• Blue Chip has a higher perfect forecast accuracy rate (67%) than the FOMC (58%).
• The FOMC’s average forecast error is slightly lower (21 bps) than the Blue Chip consensus average error (29 bps).
• Both the FOMC's SEP and the Blue Chip consensus missed the 2019 rate cuts.
• With the September rate cut in the books and high expectations of more rate cuts in the remaining meetings of 2024, both the FOMC and the Blue Chip forecasts suffer a lower average forecast accuracy and a higher average forecast error.
• Given the historical accuracy of our approach, we believe our framework would be helpful for decision makers to improve their forecast accuracy.
• We also propose that instead of following the traditional approach of forecasting the near-term fed funds rate, forecasters should consider predicting policy pivots in addition to the fed funds rate.

Why Is Accurately Predicting the Near-Term Fed Funds Rate Important?

This installment presents a new framework to predict the two-quarters-out level of the fed funds rate. We compare our framework’s fed funds forecast with the FOMC and Blue Chip's forecasts to examine who is more accurate at predicting the near-term fed funds rate.

Former Chairman of the Federal Reserve Ben Bernanke stated that central bankers utilize forecasts in policymaking and as policy communication tools.1 Researchers suggested that the FOMC forecasts may influence private sector forecasts.2 For example, the FOMC employs its fed funds forecast (along with its other forecasts) to communicate the near-term policy stance. In the short run, significant changes in the forecast would send undesirable signals and raise questions about the accuracy of the fed funds forecast. Therefore, in our view, accurately predicting the near-term path of the fed funds rate is vital for effective policymaking as well as policy communications.

A New Framework To Predict Two-Quarters-Out Fed Funds Rate

We present a new approach to predict the fed funds rate two quarters out (up to four FOMC meetings ahead). Part III of the series presented four-quarters-out probabilities of the three growth scenarios of soft-landing, stagflation and recession. We employ those probabilities as predictors and use the fed funds rate as our target variable. Given the volatile nature of the economy during the post-pandemic era, a one-year-out prediction for the fed funds rate would likely have lower accuracy, as the rapidly changing nature of potential risks would dictate a faster response from the FOMC, all else equal. Following Clarida et al. (1999), we include a lag of fed funds rates as a right-hand-side variable to capture the current policy stance.3 Clarida et al. (1999) suggested that the current level of the fed funds rate would help to determine its next phase. We utilize a quarterly dataset for the 1988-2024:Q2 period for our analysis.

Figure 1 shows the actual versus the forecasted fed funds rate. The framework effectively predicted the turning points in the fed funds rate during the 1988-2024:Q2 period. An observation from our analysis is that, in recent years, the projected fed funds rate peaked in Q4-2023 and maintained the peak in Q1-2024, which is consistent with the probabilities of the three growth scenarios. As stated in Part III, all three probabilities were elevated, but the soft-landing probability was higher than the probabilities of stagflation and recession. Moreover, the last three quarters (Q4-2023:Q2-2024) noted an upward trend in the soft-landing probability while the other two growth scenario probabilities were tending downward. Our framework estimated the fed funds rate to be 5.33% in Q2-2024. As this was a decline to last quarter's estimate of 5.40%, our framework suggested a rate cut would occur. In other words, the framework suggested that the easing cycle would start in the next two quarters.

Figure 1

Source: Federal Reserve Board and Wells Fargo Economics

Who’s Most Accurate at Predicting the Fed Funds Rates: The FOMC, Blue Chip or the New Framework?

The FOMC and Blue Chip consensus also forecast the fed funds rate, and that gives us an opportunity to compare our framework-based fed funds rate with those predictions. The FOMC started providing the SEP in 2012; therefore, we employ the 2012-2024 period to identify whose fed funds rate predictions are the most accurate. Additionally, the SEP provides year-end forecasts—the June 2024 SEP suggested that the fed funds rate will be at 5.25% (upper bound) by the end of 2024. To construct a six-months-out fed funds forecast for the FOMC, we utilize the June SEP forecast as a proxy for the year-end.

By the same token, we utilize Blue Chip consensus’ June forecast for the year-end. The June Blue Chip consensus suggests that the target fed funds rate would end 2024 at 5.00%. Table 1 shows the actual fed funds rate, the forecasts based on the new framework, the FOMC projections and the forecasts from the Blue Chip consensus. For example, the actual fed funds rate for 2015 year-end was 0.50%, the FOMC’s projection was 0.75% (June 2015 SEP), the Blue Chip consensus forecasted 0.50% (June 2015) and the new framework predicted 0.37%.

We readily acknowledge that both the FOMC and Blue Chip fed funds forecasts are actual real-time and the framework’s projections are simulated real-time. Therefore, in the first phase, we compare the FOMC and Blue Chip forecasts to determine which is more accurate. The next phase involves analyzing our framework’s projections to determine whether our approach would help decision makers improve their forecast accuracy.

Table 1

Source: Federal Reserve Board, Blue Chip Financial and Wells Fargo Economics

Although there are 13 year-end fed funds rate forecasts in the 2012-2024 period, we do not know the actual 2024-year end fed funds rate at present, so we thereby have 12 observations. As seen in Table 2, the Blue Chip consensus has a perfect forecast (when the actual fed funds rate equals the Blue Chip forecast in Table 1) accuracy rate of 67% (eight out of 12 years). The FOMC’s perfect forecast accuracy rate is only 58% (seven out of 12 years). The FOMC’s average forecast error (actual minus forecast; we employ absolute values to account for the under/over forecast) is slightly lower at 21 bps than the Blue Chip average error (29 bps). The smallest absolute change in the federal funds rate during the 2012-2024 period was 25 bps. The FOMC's error was 4 bps lower than this, while Blue Chip's error was 4 bps higher.

Both the FOMC’s SEP and the Blue Chip consensus missed the 2019 rate cuts. The June 2019 SEP predicted the federal funds rate would be 2.50% (no rate cut) at 2019 year-end, and Blue Chip predicted the same in June 2019. Both forecasts also predicted more rate hikes in the second half of 2022 but missed the magnitude of the tightening cycle: the actual 2022 year-end fed funds rate was 4.50%, but the June 2022 SEP predicted 3.50% and the June 2022 Blue Chip consensus predicted 2.50%. A similar conclusion is noted for 2023-year end—both forecasts were unable to accurately predict the year-end fed funds rate.

For 2024, the June SEP suggested 5.25% as the year-end rate, while the June Blue Chip predicted 5.00%. However, during its September meeting, the FOMC cut rates by 50 bps, bringing the upper bound of the target fed funds rate to 5.00%. Given financial market participants' high expectations (including our own forecast) of more rate cuts at the November and December FOMC meetings (the fed funds may end 2024 at 4.50%), a repeat of 2022 and 2023 is more likely than not, and both the FOMC and Blue Chip consensus are likely to miss the 2024-year end fed funds rate target. Therefore, assuming the fed funds rate is at 4.50% by the end of 2024, both the FOMC and the Blue Chip consensus would experience a lower forecast accuracy than the present level. Particularly, the FOMC’s directional accuracy would drop to 54% from 58% and the Blue Chip consensus directional accuracy would be 62% (67% at present). The FOMC’s average forecast error would uptick to 25 bps (21 bps at present) and the Blue Chip consensus average error would be 31 bps (29 bps at present).

Our framework’s six-months-out fed funds forecast differs in two major ways from the FOMC's SEP and the Blue Chip consensus: (a) our framework’s forecasts are simulated, not real time and (b) the framework’s prediction may not exactly match with the actual numbers, as the regression predicts a continuous variable (i.e., one that can take any value in the range). The FOMC, on the other hand, changes the fed funds rate by a minimum amount of 25 bps (at least in the post-1990 era). However, we believe the toolkit would be helpful for decision makers to shed light on the potential pace and duration of a policy stance.

For example, as seen in Table 1, the FOMC raised the fed funds rate in December 2015, which was the first rate hike in the post-Great Recession era. All three forecasts were able to predict the rate hike. However, the FOMC forecasted two rate hikes (assuming a 25 bps rate hike each time), and its 2015 year-end forecast was 0.75%. Although the June Blue Chip consensus forecasted one rate hike (0.50% as the 2015 year-end forecast), the May consensus suggested 1.00% as the 2015 year-end rate (three rate hikes in the second half of 2015). Our framework, on the other hand, never suggested more than one rate hike in 2015, and the highest prediction value was 0.43% (Q4-2015). Another observation we want to share is for the 2019 period. The December 2018 rate hike (which brought the fed funds rate to 2.50%) concluded the rate hike cycle of the post-Great Recession era, and the July 2019 rate cut started the rate cut cycle, where the fed funds rate ended 2019 at 1.75%. However, the June 2019 SEP forecasted the fed funds rate would be 2.50% for 2019 year-end (no rate cut), as did the June Blue Chip consensus. Our framework showed a declining trend in the fed funds rate during the first half of 2019 (our forecast peaked at 2.45% for Q4-2018 and then dropped to 2.38% by Q2-2019). In hindsight, the declining trend in the forecasted fed funds rate may have cautioned decision makers about an upcoming potential rate cut.

Recently, our framework's projected fed funds rate peaked in Q4-2023 and maintained that level in Q1-2024, which is consistent with the probabilities of the three growth scenarios. That is, the last three quarters (Q4-2023:Q2-2024) noted an upward trend in the soft-landing probability while the other two growth scenario probabilities were trending downward. The Q2-2024 estimated fed funds rate is 5.33% (a decline compared to the last quarter prediction of 5.40%), which suggested a rate cut would be in the picture. Therefore, we believe, given the historical accuracy of our toolkit, our framework would help decision makers improve their forecast accuracy.

Table 2

Source: Federal Reserve Board, Blue Chip Financial and Wells Fargo Economics

Prediction Accuracy Is Crucial for Effective Policymaking and Policy Communications

Bernanke (2024) reviewed the forecasting performance of seven central banks including the Federal Reserve, the Bank of England and the ECB. The accuracy of the central bankers’ forecasts (particularly the one-year-out inflation forecasts) declined significantly in the post-pandemic era. Moreover, Bernanke (2024) outlined some of the recommendations to design effective policy decisions and policy communications, placing emphasis on accurately identifying and quantifying risks to the outlook.

This series proposed a new framework that would help decision makers effectively quantify potential risks to the economic outlook by moving away from the traditional approach of just forecasting recession probability and/or the GDP growth rate for the near future. We suggest characterizing the growth outlook into three different regimes of soft-landing, stagflation and recession. Moreover, one-year-out probabilities of those three scenarios would shed light on the potential economic risks in the near future.

We also propose that instead of following the traditional approach of forecasting the near-term fed funds rate, an effective toolkit should predict policy pivots in addition to the fed funds forecast. By predicting a policy pivot, decision makers would be able to identify the potential duration of a policy stance. The fed funds forecast would complement the pivot prediction by identifying the appropriate pace of the policy cycle.

We are planning to regularly update our toolkit to gauge the potential duration and pace of the current easing cycle, and we’ll publish those results for the foreseeable future. In addition, we are planning to expand applications of the three growth probabilities to predict changes in different sectors of the economic and financial world.

Endnotes

1 – Bernanke, Ben. "Forecasting for Monetary Policy Making and Communication at the Bank of England: A Review." Bank of England. April 12, 2024.

2 – Hubert, Paul. (2014). "FOMC Forecasts as a Focal Point for Private Expectations." Journal of Money, Credit and Banking, Vol 46, No 7.

3 – Clarida, R., Gali, J., and Gertler, M. (1999). "The Science of Monetary Policy: A New Keynesian Perspective." Journal of Economic Literature, Vol XXXVII (December), pp 1661-1707.

• USDCAD falls sharply, accelerating prevailing retreat
• Both the RSI and the MACD detect bearish momentum
• A break below 1.3425 could extend the fall towards 1.3350
• For the outlook to brighten, a rebound above 1.3645 may be needed

USDCAD fell sharply on Tuesday, extending the retreat that started on Thursday after the pair hit resistance at 1.3645, slightly above the lower bound of the sideways range that contained most of the price action between April and August.

Yesterday’s tumble was paused today near the 1.3425 support, which stopped the pair from falling further back in February and March, but with no signs of a bullish reversal, the likelihood of the bears staying in the driver’s seat remains high.

Both the RSI and the MACD are detecting strong downside momentum. The former is well below 50, near its 30 line, though it has rebounded from near 30. The MCAD is below both its zero and trigger lines, pointing down. The RSI’s rebound implies that a minor rebound may be on the cards before the next leg south.

If so, the bears may be tempted to recharge from near the 1.3475 level and push the action below 1.3425, This could pave the way towards the 1.3350 zone, marked by the low of January 31, the break of which could allow extensions towards the low of January 5, at around 1.3285.

For the outlook to start changing to bullish, USDCAD may need to recover all the way up to the 1.3645 area. A break higher will confirm a higher high and may encourage advances towards the 1.3750 zone, which acted as the upper boundary of the aforementioned sideways range.

To sum up, USDCAD fell sharply yesterday, and although it paused near a key support zone, the technical picture suggests that the bears may stay in control for a while longer.

After two weeks of dollar weakness, the currency market is experiencing a pullback. The Dollar Index DXY is rising after briefly dipping below the 100 level. This level had already attracted buyers on the dips of 18 September but failed to reverse the trend.

Since the beginning of 2023, a move towards or through this level has sparked interest in the dollar and triggered several 4-7% rallies. Obviously, the Bulls are hoping for a new reversal from the support line that has been in place for almost two years.

In addition, a price and RSI divergence is forming on the daily timeframe, with lower price lows corresponding to higher index lows. A bounce or reversal often follows this.

However, we see limited room for a bounce in the dollar, the value is being eroded by monetary easing, as markets are pricing in almost a 60% chance of another 50-point decline in early November after a double dip in September.

At a higher level—on a weekly basis—the index has fallen below its 200-week moving average. A similar break in the ultra-long-term trend occurred in July 2020 and December 2017. In both cases, it was followed by several consecutive weeks of declines of more than 5%.

The RSI dip into oversold territory on these timeframes was not an early reversal signal. Still, it did trigger a prolonged consolidation – the dollar bulls’ last hope for the coming months.

Markets

After last week’s Fed decision, investors were happy to use soft/disappointing data to push money market pricing for ever more aggressive font-loading on Fed and ECB interest rate cuts. Fed members and even more ECB policy makers for now kept a balanced communication mostly favoring a gradual approach. Still markets now see a > 50% chance that the ECB will (have to) step up the pace of rate cuts with an ‘interim’ move in October rather than holding its quarterly pace with a next step in December. For the Fed, a cumulative 75+ bps further easing is discounted despite Fed dots suggesting a main scenario of two 25 bps steps. The US 2y yield is testing 3.55% support (low reached in the wake of the SVB crisis). The EMU 2y swap even trades at the lowest level since September 2022. Today, there was no eco news to further build on this front-loading exercise. It would be an exaggeration to call it a real rebound/correction, but US yields ‘rise’ around 3 bps, awaiting more directional impetus. German yields ‘add’ about 2-3 bps. Further out this week, US durable orders and jobless claims (tomorrow) and Friday’s (expected soft) US PC deflators, might keep yields near recent lows. The next real reference for markets and policy makers will come next week with the US ISM’s and next Friday’s payrolls. EMU flash September inflation will be published on Tuesday next week. The positive fall-out from Chinese multiple easing measures on (mostly) European equity markets already stalled (EuroStoxx 50 -0.2%). That also was the case for the impact on some cyclical commodities including Brent oil ($74/b).

In line with global yields’ trends (easing of global financial conditions), the dollar is holding close to recent lows against most other majors (DXY 100.35). The yen underperforms as markets take somewhat of a more wait-and-see approach on the pace and timing of additional BoJ tightening (USD/JPY rises from 143.23 to 144.05). Maybe a bit strange given recent awful EMU data, EUR/USD remains well bid, slightly outperforming and challenging the YTD top at 1.1202. Sterling this morning briefly tested the GBP/USD 1.343 area (highest since end Feb 2022), but sterling outperformance gradually evaporated despite BoE Green advocating a cautious approach to BoE easing and the OECD upwardly revising UK growth this and next year. After testing the 0.8320 area yesterday, EUR/GBP today rebounds to trade in the 0.8365 area. Cyclically sensitive currency (AUD, NZD, CAD, NOK) and smaller currencies (CZK, HUF, PLN) also are ceding marginal ground.

News & Views

The Swedish Riksbank cut its policy rate for a third time this year and for a second consecutive meeting by 25 bps, from 3.50% to 3.25%. If the outlook for inflation and activity remains unchanged, the policy rate may be cut at the two remaining meetings this year. A 50 bps rate cut is possible at one of these meetings. During H1 2025, the Riksbank also plots one or two further rate cuts (towards 2.25%). That’s a faster path than previously indicated which will contribute to stronger growth and inflation close to target. Updated core inflation forecasts show an average of 1.7% and 1.6% in 2024-2025, down from 1.8%-1.9% in June. The GDP pace is downwardly revised for this year (0.8% from 1.1%) with the recovery set to accelerate next year (1.9% from 1.7%) and in 2026 (2.5% from 2.4%). Risks to the scenario are linked to the recovery in the Swedish economy, the geopolitical unease, and the krona exchange rate that can lead to a different outcome for inflation and the stance of monetary policy. The krona isn’t impressed by the dovish RB turn. A large part was discounted. EUR/SEK holds near lowest levels since June at 11.31.

The OECD published its interim economic outlook today. With robust growth in trade, improvements in real incomes and a more accommodative monetary policy in many economies, the outlook projects global growth persevering at 3.2% in 2024 and 2025, after 3.1% in 2023. Inflation is projected to be back to central bank targets in most G20 economies by the end 2025. Headline inflation in the G20 economies is projected to ease to 5.4% in 2024 and 3.3% in 2025 (6.1% in 2023, with core inflation in the G20 advanced economies easing to 2.7% in 2024 and 2.1% in 2025. OECD Secretary-General Cormann sees the global economy starting to turn the corner. Downside risks include a larger than expected impact on demand from tight monetary policies and persisting geopolitical and trade tensions. Rebuilding fiscal space is key to be able to react to future shocks and future spending pressures, including from population ageing and needed investments in the digital transformation and the climate transition.

Graphs

EUR/SEK: krona holding up well even as Riksbank signals to speed up pace of policy easing/normalization.

EUR/USD setting new YTD top. Considerations of global easing outweigh poor EMU data.

EUR/GBP: sterling taking a breather after recent outperformance against the euro (and the dollar).

EUR/CZK: Krone shows no directional trend. CNB maintains 25 bps easing pace.

Daily Pivots: (S1) 142.67; (P) 143.67; (R1) 144.23; More...

No change in USD/JPY's outlook and further rise is still in favor with 141.73 minor support intact, despite loss of upside momentum as seen in 4H MACD. Rebound from 139.57 short term bottom should extend to 38.2% retracement of 161.94 to 139.57 at 148.11. On the downside, below 141.73 will turn bias to the downside for retesting 139.57 instead.

In the bigger picture, fall from 161.94 medium term top is seen as correcting whole up trend from 102.58 (2021 low). Strong support could be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to contain downside, at least on first attempt. But in any case, risk will stay on the downside as long as 149.35 resistance holds. Sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8413; (P) 0.8452; (R1) 0.8472; More…

USD/CHF is still bounded in range of 0.8374/8548 and intraday bias remains neutral. On the downside, break of 0.8374 will resume the fall from 0.9223 to retest 0.8332 low. Decisive break there will indicate larger down trend resumption. However, break of 0.8548 resistance will confirm short term bottoming, and turn bias back to the upside for 0.8747 resistance.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

Daily Pivots: (S1) 1.3358; (P) 1.3387; (R1) 1.3442; More...

Intraday bias in GBP/USD remains on the upside with 1.3331 minor support intact. Current rally should target 100% projection of 1.2664 to 1.3265 from 1.3000 at 1.3601 next. On the downside, below 1.3331 minor support will turn intraday bias neutral and bring consolidations first, before staging another rise.

In the bigger picture, up trend from 1.0351 (2022 low) is in progress. Next target is 61.8% projection of 1.0351 to 1.3141 from 1.2298 at 1.4022. For now, outlook will stay bullish as long as 1.3000 support holds, even in case of deep pullback.

Daily Pivots: (S1) 1.1128; (P) 1.1155; (R1) 1.1206; More....

EUR/USD's rise from 1.0665 resumed by breaking 1.1200. Intraday bias is now on the upside to retest 1.1274 high. Firm break there will resume larger up trend. Next near term target will be 100% projection of 1.0776 to 1.1200 from 1.1001 at 1.1425. On the downside, below 1.1020 minor support will turn intraday bias neutral first.

In the bigger picture, corrective pattern from 1.1274 should have completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm resumption of whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.1001 support holds.

Euro is gaining broadly today, even though there is no major fundamental news driving its ascent. Market expectations are mounting that ECB may cut interest rates as early as October, with HSBC projecting 25bps cuts at every meeting from October through April 2025. This would bring the deposit rate to 2.25%, which is considered close to neutral. These predictions are arising even amid cautious remarks from ECB officials.

One factor behind Euro's rise could be the market's growing anticipation of aggressive rate cuts by Fed, , with futures markets pricing in nearly 60% chance of another 50bps cut in November. This suggests that, despite potential rate cuts by ECB in October, Fed's moves could outpace those of ECB for 2024. Additionally, Euro is gaining against Swiss Franc, as speculation mounts that the SNB might deliver a 50bps rate cut in its upcoming meeting tomorrow. Meanwhile, Euro's recovery appears to be driven more by technical factors, as it found support at a near-term fibonacci projection level.

In the broader forex market, the Yen so far is the worst performer this week, followed by Dollar and Swiss Franc, while Kiwi leads gains, followed by Aussie and Loonie. Sterling and Euro sit in the middle, reflecting a typical risk-on sentiment in the market.

Technically, while EUR/GBP recovered after hitting 61.8% projection of 0.8624 to 0.8399 from 0.8463 at 0.8324, outlook will stay bearish as long as 0.8399 support turned resistance holds. Break of 0.8316 will extend the larger down trend to 100% projection at 0.8237 next.

In Europe, at the time of writing, FTSE is up 0.08%. DAX is down -0.24%. CAC is down -0.23%. UK 10-year yield is up 0.0201 at 3.962. Germany 10-year yield is up 0.029 at 2.177. Earlier in Asia, Nikkei fell -0.19%. Hong Kong HSI rose 0.68%. China Shanghai SSE rose 1.16%. Singapore Strait Times fell -1.09%. Japan 10-year JGB yield rose 0.0018 to 0.813.

OECD sees 3.2% global growth in 2024 and 2025

In the Economic Outlook Interim Report, OECD raised its global GDP growth forecast for 2024 by 0.1% to 3.2%, while keeping the 2025 projection steady at 3.2%.

In the US, growth forecasts remain unchanged at 2.6% for 2024 but have been downgraded by 0.2% to 1.6% for 2025. Eurozone's GDP growth forecast is unchanged at 0.7% for 2024 and revised down by 0.2% to 1.3% for 2025. Japan faces a significant downgrade for 2024, with growth reduced by -0.6% to -0.1%, but 2025 forecast is upgraded by 0.3% to 1.4%.

The UK sees a notable upward revision, with growth forecasts increased by 0.7% to 1.1% in 2024 and by 0.2% to 1.2% in 2025. Canada's GDP growth is slightly upgraded by 0.1% to 1.1% in 2024, remaining unchanged at 1.8% in 2025. Australia faces a sharp downgrade, with 2024 growth reduced by -0.4% to 1.1% and 2025 growth also cut by -0.4% to 1.8%.

As inflation trends toward central bank targets, OECD projects that Fed's main interest rate could ease to 3.5% by the end of 2025 from the current range of 4.75%-5%. Similarly, ECB is expected to reduce its rate to 2.25% from 3.5% now. In contrast, Japan may see "further mild increases in policy interest rates," with gradual withdrawal of policy accommodation, provided inflation stabilizes at the 2%.

BoE's Greene warns of higher neutral Rate, supports measured easing approach

BoE MPC member Megan Greene emphasized the need for a "gradual approach" to easing monetary policy in her speech today. She highlighted that her recent vote to hold the Bank Rate at 5% in September, following a 25bpps cut in August, aligns with this stance.

Greene outlined three key economic scenarios influencing inflation and policy decisions.

In the first scenario, global shocks fade, allowing inflation pressures to ease with "less restrictive" policy. In the second, some "economic slack" is needed to bring inflation back to the target sustainably. In the third, structural changes affecting wage and price-setting could require monetary policy to remain "tighter for longer".

Greene sees the second scenario as the most likely, where slack in the economy will be needed to tame inflation. However, she warned that there is a "higher risk" of the third scenario playing out, suggesting that the neutral interest rate could be higher than previously thought, meaning that current policy may not be as restrictive as anticipated. Greene noted, "I believe the risks to activity are to the upside," which could require maintaining higher rates for longer.

She will monitor data to confirm whether the third scenario risk is decreasing and the second is becoming more likely. Until then, "steady-as-she goes approach to monetary policy easing is appropriate," she added.

Australia's monthly CPI falls to 2.7%, lowest since 2021

Australia's monthly CPI slowed from 3.5% yoy to 2.7% yoy in August, marking the lowest reading since August 2021. Core inflation measures also eased, with CPI excluding volatile items and holiday travel declining to 3.0% yoy from 3.7% yoy, and the annual trimmed mean falling to 3.4% yoy from 3.8% yoy. Both underlying inflation indicators are now at their lowest levels in two and a half years.

Significant price increases were observed in Housing (+2.6%), Food and non-alcoholic beverages (+3.4%), and Alcohol and tobacco (+6.6%). These gains were "partly offset" by a -1.1% decrease in Transport costs.

Notably, electricity prices plummeted by -17.9% over the 12 months to August—the largest annual fall since the early 1980s—driven by Commonwealth and State Government rebates that led to a -14.6% drop in August following a -6.4% decline in July. Excluding these rebates, electricity prices would have risen 0.1% in August and 0.9% in July.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1128; (P) 1.1155; (R1) 1.1206; More....

EUR/USD's rise from 1.0665 resumed by breaking 1.1200. Intraday bias is now on the upside to retest 1.1274 high. Firm break there will resume larger up trend. Next near term target will be 100% projection of 1.0776 to 1.1200 from 1.1001 at 1.1425. On the downside, below 1.1020 minor support will turn intraday bias neutral first.

In the bigger picture, corrective pattern from 1.1274 should have completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm resumption of whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.1001 support holds.

Economic Indicators Update