Finance

Following its two-day policy meeting, the central bank’s rate-setting Federal Open Market Committee said it will keep its benchmark overnight borrowing rate in a range between 5.25%-5.5%.
Along with the decision, Fed officials penciled in three quarter-percentage point cuts by the end of 2024, which would be the first reductions since the early days of the Covid pandemic in March 2020.

The Federal Reserve on Wednesday held interest rates steady as expected and signaled it still plans multiple cuts before the end of the year.
Following its two-day policy meeting, the central bank’s rate-setting Federal Open Market Committee said it will keep its benchmark overnight borrowing rate in a range between 5.25%-5.5%, where it has held since July 2023.

Along with the decision, Fed officials penciled in three quarter-percentage point cuts by the end of 2024, which would be the first reductions since the early days of the Covid pandemic in March 2020.
The current federal funds rate level is the highest in more than 23 years. The rate sets what banks charge each other for overnight lending but feeds through to many forms of consumer debt.

The outlook for three cuts came from the Fed’s “dot plot,” a closely watched matrix of anonymous projections from the 19 officials who comprise the FOMC. The chart provides no indication for the timing of the moves.
Chair Jerome Powell said the Fed also did not elaborate on timing but said he still expects the cuts to come, as long as the data cooperate. Futures markets following the meeting were pricing in a nearly 75% probability that the first cut comes at the June 11-12 meeting, according to the CME Group’s FedWatch gauge.
“We believe that our policy rate is likely at its peak for this type of cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said at his post-meeting news conference. “We are prepared to maintain the current target range for the federal funds rate for longer if appropriate.”

The plot indicated three cuts in 2025 – one fewer than the last time the grid was updated in December. The committee sees three more reductions in 2026 and then two more in the future until the fed funds rate settles in around 2.6%, near what policymakers estimate to be the “neutral rate” that is neither stimulative nor restrictive.
The grid is part of the Fed’s Summary of Economic Projections, which also provides estimates for gross domestic product, inflation and unemployment. The dot assortment skewed somewhat hawkish from December in terms of deviations from the median, but not enough to change this year’s projections.
Markets rallied following the release of the FOMC decision. The Dow Jones Industrial Average finished the session up 401 points, or just over 1%. Treasury yields headed mostly lower, with the benchmark 10-year note most recently at 4.28%, off 0.01 percentage point.
“The sum total of this ‘no news is good news’ press conference is that markets continue to have a green light to run higher,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “We aren’t surprised to see the initial reaction from investors to be to push stock prices up and expect that to continue until some new shock hits the system because this Fed isn’t going to stand in the way of the bull market.”

Raises GDP forecast

Officials sharply accelerated their projections for GDP growth this year and now see the economy running at a 2.1% annualized rate, up from the 1.4% estimate in December. The unemployment rate forecast moved slightly lower from the previous estimate to 4%, while the projection for core inflation as measured by personal consumption expenditures rose to 2.6%, up 0.2 percentage point from before but slightly below the most recent level of 2.8%. The unemployment rate for February was 3.9%.
The outlook for GDP also rose incrementally for the next two years. Core PCE inflation is expected to get back to target by 2026, same as in December.
The FOMC’s post-meeting statement was almost identical to the one delivered at its last meeting in January save for an upgrade on its job growth assessment to “strong” from the January characterization that gains had “moderated.” The decision to stand pat on rates was approved unanimously.
Markets had been watching closely for clues about where the Fed would go from here with monetary policy.
Earlier this year, traders in the fed funds futures market had strongly priced in a likelihood that the central bank would start cutting at this week’s meeting and continue doing so until it had totaled as many as seven decreases by the end of the year. However, recent developments have changed that outlook dramatically.
Higher-than-expected inflation data to start 2024 triggered caution from top Fed officials, and the January FOMC meeting concluded with the central bank saying it needed more evidence that prices were decelerating before it would gain “greater confidence” on inflation and start cutting.
Statements from Powell and other policymakers since then added to the sentiment of a patient, data-driven approach, and markets have had to reprice. Powell and his cohorts have indicated that with the economy still growing at a healthy pace and unemployment below 4%, they can take a more measured approach when loosening monetary policy.
“The economy is strong, inflation has come way down,” Powell said, “and that gives us the ability to approach this question carefully and feel more confident that inflation is moving down sustainably at 2% when we take that step to begin dialing back our restrictive policy.”
The expectation heading into this week’s meeting is for the first cut to happen in June and two more to follow, bringing markets and Fed officials back into alignment.
Beyond that, markets also were looking for some direction on the Fed’s balance sheet reduction program.
In a process that began in June 2022, the central bank is allowing up to $60 billion a month in maturing proceeds from Treasurys plus up to $35 billion in mortgage-backed securities to roll off each month rather than be reinvested. The process is often referred to as “quantitative tightening” and has resulted in about a $1.4 trillion drawdown in the Fed’s holdings.
Powell confirmed the issue was discussed at the meeting but noted that no decisions were made on the extent and timing of the potential balance sheet reduction.
“While we did not make any decisions today, the general sense of the committee is that it will be appropriate to slow the pace of runoff fairly soon, consistent with the plans we previously issued,” he said.

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Some hikers believe that the last mile is the hardest: all the blisters and accumulated aches slow progress at the very end. Others swear that it is the easiest because the finishing line is in sight. For the Federal Reserve, the last mile of its trek to bring inflation back to its 2% target has been simultaneously easy and hard. Easy in the sense that the central bank has not budged on interest rates for eight months, instead letting its previous tightening do the work. Hard because the wait for inflation to recede has felt rather long.image: The EconomistThe slow easing of price pressures and America’s continued economic vigour have fuelled debate about whether the Fed might therefore chart a more aggressive course for the last mile of its anti-inflation journey. Policymakers had telegraphed that they would make three quarter-point rate cuts this year. But since then some prominent measures of inflation have seemingly got stuck at around 3-4%, while the unemployment rate has remained below 4%. So the big question heading into a monetary-policy meeting that concluded on March 20th was whether the Fed might pare its projection to two cuts. In the end, the central bank (or, to be a little more precise, the median voting member of its rate-setting committee) opted to maintain its outlook for three cuts in 2024, though it lowered its projection for 2025 to three cuts from four.An important gap in inflation measures helps explain the Fed’s rationale for sticking with its plan for this year. Much of the concern about the persistence of inflation stems from recent readings of the consumer price index. “Core” CPI, which strips out volatile food and energy costs, decelerated throughout much of 2022 and early 2023, but since last June has picked up speed. In both January and February it rose at a monthly clip of roughly 0.4%, a rate which, if sustained for a full year, would lead to annual inflation of about 5%—far too high for comfort for the Fed. In such a scenario America’s central bankers would be fretting not about cutting rates but about whether to resume raising them.Yet whereas investors and commentators tend to emphasise the CPI, in no small part because it is the first inflation data point each month, the central bank’s focus is a separate gauge: the price index for personal consumption expenditures, which comes out several weeks later. Core PCE prices have been better behaved. Although they heated up in January, their annualised pace over the past half-year has been smack in line with the Fed’s 2% inflation target. This has helped give central bankers the confidence that they can start trimming rates relatively soon.At a press conference after its meeting Jerome Powell, the Fed’s chairman, studiously avoided giving any strong hints about when the central bank will make its first cut. But the market—as implied by the price of rate-hedging contracts—expects that it will get under way in June. And Mr Powell was generally satisfied with price trends. “We continue to make good progress in bringing inflation down,” he said.image: The EconomistWhat accounts for the CPI-PCE divergence? The CPI is more rigid, with its components adjusted annually; the PCE is in effect adjusted every month, reflecting, for example, whether consumers substitute cheaper apples for dearer oranges. Over time that leads to slightly lower PCE price growth. Different weightings have also had a big impact this year. Housing makes up about a third of the CPI basket but just 15% of the PCE one, and stubbornly high rents have kept the CPI elevated. There are other differences, too. For instance, airfares pushed up the CPI in February, based on prices for a fixed set of flight routes. The PCE, which considers distances actually flown, has been lower.Another question for the Fed is where it wants to end up. In an ideal world central bankers would guide a full-employment, stable-inflation economy to what is known as the neutral rate of interest, the level at which monetary policy is neither expansionary nor contractionary. In reality, although there is no way of observing the neutral rate the Fed still tries to aim for it, with its policymakers writing down their estimates every quarter. Since 2019 their median projection has, in real terms, been 0.5% (ie, a Fed-funds rate of 2.5% and a PCE inflation rate of 2%).That has changed, albeit pretty imperceptibly. Narrowly, the Fed’s new median projection for rates in the long run shifted up to 2.6%, implying a real neutral rate of 0.6%. This may sound like a puny, academic difference. But it lies at the core of central-bank thinking about post-pandemic growth, in particular whether it believes that rates should be higher on an ongoing basis in order to avoid economic overheating, perhaps because of rising productivity or excessive government spending. Officials appear to be heading towards that view, though Mr Powell demurred on drawing any conclusions based on the upward creep in long-run rates.The Fed has still to travel the last mile in its fight against inflation. Even once the journey comes to an end, a difficult interest-rate question will remain. ■ More

Federal Reserve Chairman Jerome Powell testifies during the Senate Banking, Housing and Urban Affairs Committee hearing titled “The Semiannual Monetary Policy Report to the Congress,” in Dirksen Building on Thursday, March 7, 2024.
Tom Williams | Cq-roll Call, Inc. | Getty Images

Federal Reserve members still see three interest rate cuts in 2024 despite an improving outlook for economic growth.
The Federal Open Market Committee’s March projections for rate cuts, or the so-called “dot plot,” shows a median Federal funds rate of 4.6% in 2024. With the current fed funds rate in a range of 5.25% to 5.50%, the dot plot implies three cuts of a 0.25 percentage point each.

Arrows pointing outwards

Federal Reserve

The previous Summary of Economic Projections (SEP) from December also showed three rate cuts in 2024.
However, the projected change in real GDP for 2024 was 2.1% in the March projection, up from 1.4% in December. Core PCE inflation projections also ticked up, to 2.6% from 2.4%.
The updated projections came after inflation reports for January and February dampened hopes that the Fed has price increases under control. Traders had already been dialing back rate cut projections for this year ahead of Wednesday’s update from the central bank.
“The FOMC’s SEP continues to show [0.75%] of rate cuts this year, even as the core-PCE estimate was increased by 0.2 pp to 2.6%,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “We’ll argue this is the most relevant takeaway from the SEP because it suggests the upside seen in realized inflation early this year is being dismissed by monetary policymakers.”
Fed Chair Jerome Powell said in his news conference Wednesday that the central bank wasn’t completely dismissing the recent inflation reports, though he did say that the January data may have been distorted by seasonal factors.

“I take the two of them together, and I think they haven’t really changed the overall story, which is that of inflation moving down gradually, on a sometimes bumpy road, toward 2%,” Powell said.
There were some smaller changes within the dot plot. In December, there was a bigger split among individual Fed members, with two FOMC voters indicating zero cuts in 2024 and another seeing six reductions. The most aggressive prediction now, in the March projections, has been dialed back to just four cuts.
Additionally, the median projection for the fed funds rate in 2025 rose to 3.9% from 3.6%, implying one less cut. The long-run projection for that benchmark rate ticked up to 2.6% from 2.5%.

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This is a comparison of Wednesday’s Federal Open Market Committee statement with the one issued after the Fed’s previous policymaking meeting in January.
Text removed from the January statement is in red with a horizontal line through the middle.

Text appearing for the first time in the new statement is in red and underlined.
Black text appears in both statements.

Arrows pointing outwards More

Headline inflation slid by more than expected to an annual 3.4% in February, its lowest level since September 2021, fresh data showed Wednesday.
January labor market data last week showed a weaker picture across all key metrics, with wage growth slowing, unemployment rising and vacancy numbers slipping for the 20th consecutive month.

The Bank of England in the City of London, after figures showed Britain’s economy slipped into a recession at the end of 2023.
Yui Mok | Pa Images | Getty Images

LONDON — The Bank of England is widely expected to keep interest rates unchanged at 5.25% on Thursday, but economists are divided on when the first cut will come.
Headline inflation slid by more than expected to an annual 3.4% in February, hitting its lowest level since September 2021, data showed Wednesday. The central bank expects the consumer price index to return to its 2% target in the second quarter, as the household energy price cap is once again lowered in April.

The larger-than-expected fall in both the headline and core figures was welcome news for policymakers ahead of this week’s interest rate decision, though the Monetary Policy Committee has so far been reluctant to offer strong guidance on the timing of its first reduction.
The U.K. economy slid into a technical recession in the final quarter of 2023 and has endured two years of stagnation, following a huge gas supply shock in the wake of Russia’s invasion of Ukraine. Berenberg Senior Economist Kallum Pickering said that the Bank will likely hope to loosen policy soon in order to support a burgeoning economic recovery.
Pickering suggested that, in light of the inflation data of Wednesday, the MPC may “give a nod to current market expectations for a first cut in June,” which it can then cement in the updated economic projections of May.
“A further dovish tweak at the March meeting would be in line with the trend in recent meetings of policymakers gradually losing their hawkish bias and turning instead towards the question of when to cut rates,” he added.

At the February meeting, two of the nine MPC decision-makers still voted to hike the main Bank rate by another 25 basis points to 5.5%, while another voted to cut by 25 basis points. Pickering suggested both hawks may opt to hold rates this week, or that one more member may favor a cut, and noted that “the early moves of dissenters have often signalled upcoming turning points” in the Bank’s rate cycles.

Berenberg expects headline annual inflation to fall to 2% in the spring and remain close to that level for the remainder of the year. It is anticipating five 25 basis point cuts from the Bank to take its main rate to 4% by the end of the year, before a further 50 basis points of cuts to 3.5% in early 2025. This would still mean interest rates would exceed inflation through at least the next two years.
“The risks to our call are tilted towards fewer cuts in 2025 – especially if the economic recovery builds a head of steam and policymakers begin to worry that strong growth could reignite wage pressures in already tight labour markets,” Pickering added.
Heading the right way, but not ‘home and dry’
A key focus for the MPC has been the U.K.’s tight labor market, which it feared risked entrenching inflationary risks in the economy.
January data published last week showed a weaker picture across all labor market metrics, with wage growth slowing, unemployment rising and vacancy numbers slipping for the 20th consecutive month.
Victoria Clarke, U.K. chief economist at Santander CIB, said that, after last week’s softer labor market figures, the inflation reading of Wednesday was a further indication that embedded risks have reduced and that inflation is on a path towards a sustainable return to target.
“Nevertheless, services inflation is largely tracking the BoE forecast since February, and remains elevated. As such, we do not expect the BoE to conclude it is ‘home and dry’, especially with April being a critical point for U.K. inflation, with the near 10% National Living Wage rise and many firms already having announced, and some implemented, their living wage-linked pay increases,” Clarke said by email.

“The BoE needs data on how broad an uplift this delivers to pay-setting, and hard information on how much is passed through to price-setting over the months that follow.”
Santander judges that the Bank could decide it has seen enough data to cut rates in June, but Clarke argued that an August trim would be “more prudent” given the “month-to-month noise” in labor market figures.
This sentiment was echoed by Moody’s Analytics on Wednesday, with Senior Economist David Muir also suggesting that the MPC will need more evidence to be satisfied that inflationary pressures are contained.
“In particular, services inflation, and wage growth, need to moderate further. We expect this necessary easing to unfold through the first half of the year, allowing a cut in interest rates to be announced in August. That said, uncertainty is high around the timing and the extent of rate cuts this year,” Muir added. More

Trade tensions between Europe and Beijing will likely escalate due to China’s growing ability to manufacture more cheaply in strategic industries, according to Jens Eskelund, president of the European Union Chamber of Commerce in China.
He said the chamber was seeing “overcapacity across the board,” whether in chemicals, metals or electric vehicles. “I’ve met very few companies that do not face it,” he said.
Eskelund was speaking at a media briefing for the chamber’s report, co-authored with consultancy China Macro Group and released Wednesday, on the growing political risks for European businesses in China.

A photovoltaic module company in Hefei, Anhui province, on Feb. 20, 2024.
Future Publishing | Future Publishing | Getty Images

BEIJING — Trade tensions between Europe and Beijing will likely escalate due to China’s growing ability to manufacture more cheaply in strategic industries, according to Jens Eskelund, president of the European Union Chamber of Commerce in China.
“What we see right now is the unfolding of a slow-motion train accident,” he told reporters at a briefing last week.

“Europe cannot just accept that strategically viable industries constituting the European industrial base are being priced out of the market,” Eskelund said. “That’s when trade becomes a security question and I think that is perhaps not fully appreciated in China just yet.”

There needs to be an honest conversation between Europe and China about what this is going to mean.

Jens Eskelund
president, EU Chamber of Commerce in China

Chinese authorities have promoted high-end manufacturing as a way to boost technological self-sufficiency and wean the economy off its reliance on real estate for growth. Investment and state financial support for manufacturing have gone up, while that for property has dropped.
Beijing’s emphasis on manufacturing has prompted concerns about overcapacity — China’s ability to produce far more goods than the country or other countries can absorb can then result in price wars.
Eskelund said the chamber was seeing “overcapacity across the board,” whether in chemicals, metals or electric vehicles. “I’ve met very few companies that do not face it,” he said.
“We haven’t seen all that capacity coming online just yet,” he said. “This is something that’s going to hit markets over the next few years.”

“There needs to be an honest conversation between Europe and China about what this is going to mean,” Eskelund said, noting that both sides need to find a way to ensure most trade flows aren’t disrupted.
“It is hard for me to imagine that Europe would just sit by and quietly witness the accelerated deindustrialization of Europe, because of the externalization of low domestic demand in China,” he said.
Manufacturing accounts for nearly one-fifth of employment in the EU — making it the largest category. The sector is also the largest contributor to what the bloc calls its “business economy value added,” with a share of nearly a quarter.
The EU was China’s largest regional trading partner until Southeast Asia recently surpassed it. The U.S. is China’s largest trading partner on a single-country basis.

Growing emphasis on security

Eskelund was speaking at a media briefing for the chamber’s report, co-authored with consultancy China Macro Group and released Wednesday, on the growing political risks for European businesses in China.
Despite the EU’s currently targeted policy stance, broader U.S. actions and Beijing’s response have made operations in China more difficult for European businesses, the report said.
The U.S. has cited national security for export restrictions on Chinese companies’ access to advanced semiconductor technology. Recent legislative efforts have targeted popular social media app TikTok for risks due to its Chinese ownership.

China has us in a geopolitical trap. We remain dependent on sourcing from China but we cannot sell to the market.

Unnamed executive
EU Chamber of Commerce in China report

In China, mentions of security have increased significantly in Beijing’s latest five-year planning document versus prior ones, said Markus Herrmann Chen, co-founder and managing director of China Macro Group, at the media briefing.
He pointed out that every major Chinese ministry, except for veteran affairs, has adopted the concept of “coordinating development and security.”  

Trade tilting out of balance

While not directly in the crosshairs of U.S.-China tensions, there are already signs of impact on European businesses.
The report cited one unnamed member in advanced manufacturing as saying their company’s market share in China collapsed to nothing, down from 35%, over the course of 10 years.
“China has us in a geopolitical trap. We remain dependent on sourcing from China but we cannot sell to the market,” the unnamed executive said in the report. “We are investing elsewhere to diversify, but in practice this will take a long-time – maybe more than 10 years.”
“A key challenge is that pricing mechanisms in Europe are so depressed that if we were to drop our Chinese partners today, we would not be able to sell at European auctions, due to us not being able to compete with the prices of Chinese players,” the executive was quoted as saying.
Businesses in Europe and many countries are only buying more from Chinese companies.
China is increasingly sending more goods to Europe via container ships than the other way around, Eskelund said, noting a significant increase since before the pandemic.
“China’s exports achieved the highest share of global exports ever,” he said. “What worries me is that China imports are underperforming as much as they are.” More

The Fed has a lot to do at its meeting this week, but ultimately may not end up doing a whole lot in terms of changing the outlook for monetary policy.
Though the quarterly plot of individual members’ expectations is pretty arcane, this meeting likely will be all about the Federal Open Market Committee’s “dot plot” of individual member’s interest rate expectations.
Officials also will release their quarterly update on the economy, specifically for gross domestic product, inflation and the unemployment rate.

Federal Reserve Bank Chairman Jerome Powell testifies before the House Financial Services Committee in the Rayburn House Office Building on Capitol Hill on March 06, 2024 in Washington, DC. 
Chip Somodevilla | Getty Images

The Federal Reserve has a lot to do at its meeting this week, but ultimately may not end up doing a whole lot in terms of changing the outlook for monetary policy.
In addition to releasing its rate decision after the meeting wraps up Wednesday, the central bank will update its economic projections as well as its unofficial forecast for the direction of interest rates over the next several years.

As expectations have swung sharply this year for where the Fed is headed, this week’s two-day session of the Federal Open Market Committee will draw careful scrutiny for any clues about the direction of interest rates.
Yet the general feeling is that policymakers will stick to their recent messaging, which has emphasized a patient, data-driven approach with no hurry to cut rates until there’s greater visibility on inflation.
“They’ll make it clear that they’re obviously not ready to cut rates. They need a few more data points to feel confident that inflation is heading back to target,” said Mark Zandi, chief economist at Moody’s Analytics. “I expect them to reaffirm three rate cuts this year, so that would suggest the first rate cut would be in June.”
Markets have had to adjust to the Fed’s approach on the fly, scaling back both the timing and frequency of expected cuts this year. Earlier this year, traders in the fed funds futures market were anticipating the rate-cutting campaign to kick off in March and continue until the FOMC had cut the equivalent of six or seven times in quarter percentage points increments.
Now, the market has pushed out the timing until at least June, with only three cuts anticipated from the current target range of 5.25%-5.5% for the Fed’s benchmark overnight borrowing rate.

The swing in expectations will make how the Fed delivers its message this week all the more important. Here’s a quick look at what to expect:

The ‘dot plot’

Though the quarterly plot of individual members’ expectations is pretty arcane, this meeting likely will be all about the dots. Specifically, investors will look at how the 19 FOMC members, both voters and nonvoters, will indicate their expectations for rates through the end of the year and out to 2026 and beyond.
When the matrix was last updated in December, the dots pointed to three cuts in 2024, four in 2025, three more in 2026, and then two more at some point to take the long-range federal funds rate down to around 2.5%, which the Fed considers “neutral” — neither promoting nor restricting growth.

Doing the math, it would only take two FOMC members to get more hawkish to reduce the rate cuts this year to two. That, however, is not the general expectation.
“It only takes two individual dots moving higher to raise the 2024 median. Three dots are enough to push the long-run dot 25bp higher,” Citigroup economist Andrew Hollenhorst said in a client note. “But the combination of inconclusive activity data and slowing year-on-year core inflation should be just enough to keep dots in place and [Fed Chair Jerome] Powell still guiding that the committee is on track to gain ‘greater confidence’ to cut policy rates this year.”

The rate call for March

More immediately, the FOMC will conduct a largely academic vote on what to do with rates now.
Simply put, there is zero chance the committee votes to cut rates at this week. The statement from the last meeting all but ruled out an imminent move, and public statements from virtually every Fed speaker since then have also ruled out a decrease.
What this statement could indicate is perhaps a thawing in the outlook and an adjustment of the bar that the data will need to clear to justify future cuts.
“We still expect the Fed to cut interest rates in June, although we don’t expect officials to provide a strong steer either for or against” following the March meeting, wrote Paul Ashworth, chief North America economist at Capital Economics.

The economic outlook

Along with the dot plot, the Fed will release its quarterly update on the economy, specifically for gross domestic product, inflation and the unemployment rate. Collectively, the estimates are known as the Summary of Economic Projections, or SEP.
Again, there’s not a lot of expectations that the Fed will change its outlook from December, which reflected cuts in the expectation for inflation and an upgrade for GDP. For this meeting, the focus will fall squarely on inflation and how that affects the expectations for rates.
“While inflation has hit a bump in the road, the activity data suggest the economy is not overheating,” Bank of America economist Michael Gapen wrote. “We think the Fed will still forecast three cuts this year, but it is a very close call.”
Most economists think the Fed could raise its GDP forecast again, though not dramatically, while possibly tweaking the inflation outlook a touch higher.

Big picture

On a broader scale, markets likely will be looking for the Fed to follow the recent plotline of fewer cuts this year — but still cuts. There also will be some anticipation over what the Fed says about its balance sheet reduction. Powell has indicated the issue will be discussed at this meeting, and some details could emerge of when and how the Fed will slow and ultimately halt the reduction in its bond holdings.
It won’t be just Wall Street watching, either.
Though not official policy, most central banks around the world take their cues from the Fed. When the U.S. central bank says it is moving cautiously because it fears inflation could spike again if it eases too soon, its global counterparts take notice.
With worries escalating over growth in some parts of the globe, central bankers also want some type of go signal. Higher interest rates tend to put upward pressure on currencies and raise prices for goods and services.
“The rest of the world is waiting for the Fed,” said Zandi, the Moody’s economist. “They would prefer not to have their currencies fall in value and put further upward pressure on inflation. So they would really, really like the Fed to start leading the way.” More

A radical monetary-policy experiment has all but come to an end. On March 19th officials at the Bank of Japan (BoJ) announced that, with inflation of 2% “in sight”, they would scrap a suite of measures instituted to pull the economy out of its deflationary doldrums. The bank raised its key interest rate for the first time since 2007, from minus 0.1% to between 0 and 0.1%, becoming the last central bank in the world to do away with a negative-interest-rate policy. It will also stop purchasing exchange-traded funds and abolish its yield-curve-control framework, a tool to cap long-term bond yields. Even so, the BoJ also made clear that its stance would remain broadly accommodative: the withdrawal of its most unconventional policies does not augur the beginning of a tightening cycle.This shift reflects changes in the underlying condition of the Japanese economy. Inflation has been above the bank’s 2% target for 22 months. Data from annual negotiations between trade unions and large firms released last week suggest wage growth of over 5% for the first time in 33 years. “The BoJ has confirmed what many people have been suspecting: the Japanese economy has changed, it has gotten out of deflation,” says Hoshi Takeo of the University of Tokyo. That hardly means Japan is booming—consumption is weak and growth is anaemic. But the economy no longer requires an entire armoury of policies designed to raise inflation. When Ueda Kazuo, the BoJ’s governor, was asked what he would name his new framework, he said it did not require a special name. It was “normal” monetary policy.image: The EconomistJapan’s economy slid into deflation in the 1990s, following the bursting of an asset bubble and the failure of several financial institutions. The BoJ began trying new tools cautiously at first. Although in 1999 the bank cut interest rates to zero, it lifted them the following year, only to see prices fall again (one of two board members opposed to the decision at the time was Mr Ueda). The BoJ then went further, becoming the first post-war central bank to implement quantitative easing—the buying of bonds with newly created money—in 2001.Yet it did not fully embrace the wild side of monetary policy until the arrival of Kuroda Haruhiko as governor in 2013. Backed by then-prime minister Abe Shinzo, Mr Kuroda embarked on a programme of vast monetary easing, vowing to unleash a “bazooka” of stimulus. The bank adopted a 2% inflation target and began “quantitative and qualitative easing”, which saw enormous government-bond purchases coupled with aggressive forward guidance (promises to keep policy loose). In 2016 the bank set its key overnight rate at minus 0.1%, and then implemented yield-curve control in order to restrain longer-term interest rates, too. Although inflation picked up a bit, it never consistently reached the central bank’s target during Mr Kuroda’s term, which ended nearly a year ago.Officials are now confident that inflation has at last become embedded and the Japanese economy is strong enough to get by without extreme measures. Supply-chain snags and rising import costs pushed inflation up at first, but price rises have since become widespread. GDP growth figures for the last quarter of 2023 were recently revised into positive territory owing to an uptick in capital expenditure.image: The EconomistThe missing piece of the puzzle had been wages. Last year annual wage negotiations produced gains of 3.8%, the highest in three decades. But wage growth still trailed inflation itself, leaving real incomes falling. Then came last week’s blockbuster numbers. They included a big boost to the so-called base-up portion of Japanese wages, which is not linked to seniority. A sustained period of rising prices has emboldened unions to push forcefully for higher pay; Japan’s shrinking labour force is also forcing firms to compete for talent. Policymakers “have been very, very patient, deliberately waiting for the right timing”, says Nakaso Hiroshi, a former BoJ deputy governor. “And now the time is right.”For such a momentous decision, the short-term impact is likely to be limited. The BoJ had hinted at its intentions ahead of time, meaning markets priced in the move. The yen depreciated slightly against the dollar following the announcement. The bank had already loosened its yield cap last year. Long-term yields have settled at around 0.7% to 0.8%, below the scrapped 1% reference point. Although some Japanese investors may bring funds home as a consequence of the policy shift, global capital flows are unlikely to move drastically, since rates in Japan will still be quite low by international standards, notes Kiuchi Takahide of Nomura Research Institute, a research outfit. Nor will the change to the policy rate have a big effect: under the BoJ’s old framework, there were three tiers of accounts, and the share of funds held in those subject to negative rates was minimal.The big question is where the BoJ goes from here. Officials have been careful to signal that they are not embarking on a tightening cycle. In a speech last month, Uchida Shinichi, a deputy governor, said there would not be a rapid series of rate rises. Mr Ueda offered few clues about where he suspects rates will settle; most economists reckon they will not exceed 0.5%. The BoJ will also continue buying “broadly the same amount” of government bonds to continue controlling long-term rates. Normalisation of its own balance-sheet will be a gradual process. “The BoJ has left a huge footprint on the market,” says Kato Izuru of Totan Research, a think-tank. “They want to reduce that footprint, but it cannot be reduced suddenly.”Monetary menaceAs the BoJ enters its new era of policymaking, several risks loom. One comes from overseas. If there is a slowdown in America or China, Japan’s two biggest trading partners, it would weigh on external demand and drag down the outlook for Japanese firms, making them less likely to invest.Another risk comes from within. In the long run, interest payments on Japan’s sizeable government debt will rise, putting pressure on the public finances. The financial system looks sound, but Japan’s financial regulator recently stepped up oversight of regional lenders’ loan books. Many observers are concerned about the impact of rate rises on mortgages and small and medium-sized businesses that do not have large cash buffers.Most worrying, inflation could fall below target once again. Price inflation, while still above 2%, is already falling. Two doveish board members voted against the decision to abolish negative interest rates, arguing that more time was needed to be sure that inflation will stick. For the trend to continue, Japan needs reforms that raise productivity and boost the potential growth rate, Mr Nakaso argues. If there is one lesson from Japan’s era of monetary-policy experiments, it is that there are limits to central banks’ powers. During Japan’s new era, others will have to take the lead. ■ More