The backdrop of the US-Iran agreement continued to support sentiment, with brent crude sliding to pre-conflict lows below US$80/bbl during the week. Equities advanced broadly, but upside in the US was capped somewhat by a hawkish Fed at Chair Warsh's first meeting at the helm. This drove a flatter curve in the US and boosted the dollar. Despite the BoJ hiking rates by 25bps to 1%, USDJPY remains firmly above 160 and at highs since mid 2024.
The first meeting led by Chair Warsh saw the Fed hold at 3.5-3.75% but the overall tone was more hawkish than expected. The main driver was the FOMC's updated projections, which now point to a rate hike by year-end - a notable shift from the rate cut implied in the March forecasts. A focus on returning inflation to target by the pledge that the FOMC 'will deliver price stability' was the clear message across the communications set, including a now trimmed-down decision statement and at the post-meeting press conference. Additionally, Warsh stressed that he would refrain from giving policy guidance, firm in the view that the FOMC should use market pricing as a signal rather than the other way round.
The Bank of England kept rates steady at 3.75%, voted through on a 7-2 majority by the Monetary Policy Committee. The only change to the vote split from the April meeting came from Megan Greene joining Huw Pill in voting for a 25bps hike. The core of the MPC in leaving rates on hold continued to place more weight on weakness in the labour market and in the economy more broadly than on hiking as a risk mitigation strategy to the energy price shock.
The UK May CPI data on the eve of the meeting was a factor that helped the MPC maintain this approach. Headline inflation held at a 2.8%yr pace (vs 3% exp) while core conflation rose less than expected to 2.6%yr (vs 2.7%) from 2.5%. In his policy comments, Governor Bailey noted that tolerating above-target inflation due largely to energy prices was currently an appropriate trade-off for the MPC to manage given the recent data had provided 'greater confidence' that underlying disinflationary trends in the UK economy remained in place.
In Australia, the RBA paused the cash rate at 4.35% this week after three straight hikes were judged to have left policy 'well placed' to respond to an outlook of 'heighted uncertainties'. The Board, however, left no room for doubt adding the line to its existing tightening bias that 'increasing the cash rate further' was possible as upside risks to inflation remained. That looks like a move aimed at ensuring financial conditions do not start to loosen, with market pricing for a rate hike by year-end now only seen as a roughly 50/50 prospect.
At the post-meeting press conference, Governor Bullock said that rate hikes were already weighing on household spending and slowing the housing market. In addition, there was little concern attached to the recent rise in the unemployment rate and the lacklustre Q1 GDP growth outcome, with Bullock saying these are the sorts of data points that are required to reduce inflationary pressures. For more on this week's meeting, please see my review here.
