Big week for central banks

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Ethan Wu (0:36)

Thank Pushkin. Central banks have inarguably been the most important force in the global economy, in global markets of the past two years. And this week, three key central banks, the US Federal Reserve, the European Central Bank, and the Bank of Japan have key policy meetings to decide where the global economy is going to go. If you are a close watcher of the markets, this week matters.

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined as ever on Tuesdays by the woman who has seen more ECB press conferences than any FT staffer, potentially any human being in history, other than Christine Lagarde, FT markets editor, Katie Martin.

Katie Martin (1:23)

Well, you know, that's not true, but I'm prepared to go with it. I've certainly watched an awful lot of European Central Bank press conferences to the point where I had a pretty encyclopedic knowledge of which tie the former European Central Bank president Mario Draghi had warned to which press conference and what market reaction came after each of them.

So to that extent, definitely a specialist, but I've never been in the room, so there you go.

Ethan Wu (1:50)

I rest my case.

Katie, we're talking today about three Central Bank meetings that are all happening this week. Let's go one by one, starting with the Fed, which is the earliest, that's Wednesday, to paint the set up here. US inflation is, by global standards, really not bad, at least at the headline level. It's about 3% if you include the falling price of energy. It's a bit higher if you look at core inflation, which gets rid of energy and food.

In the US, we have a lot of, I would say positive signs about inflation. You have rent inflation slowing, you have wage growth coming down but not crashing, unemployment's still low.

You have some of the big pandemic anomalies, like used cars coming in nicely. There's a lot of things shaping up pretty well for the US economy. And I think you've been seeing in the past couple weeks, even some of the most bearish people on Wall Street have had to kind of revise up their expectations of where the US economy is going to be. I read a very interesting note this past week from Matthew Luzzetti, who's the chief economist at Deutsche Bank. And he's been like really big in the recession camp for a while. And he wrote a, I thought very well considered note, reassessing the case for soft landing. Again, from a dude who's been banging the recession drum for quite a while, I think that really captures where the street is at. That there was, and I think still is actually, like a two thirds consensus estimate for recession in the next year. That's starting to come down. People are starting to come around and say, the data just looks better. No way around it. Katie, you and I had made a bet on the US economy just a few episodes back. I think you were Q3 2024 was when you thought the US recession was going to be. I said Q1 and we put a beer on it.

I gotta say things are going in your direction.

Katie Martin (3:27)

I wonder if you're fibbing here, Ethan. I think perhaps you were kind of late this year, but I was definitely later than you.

Ethan Wu (3:34)

Yeah, you were later than me. That's what matters. And frankly, Q4, Q1, things really seem to be going your way and not mine.

Katie Martin (3:39)

Don't start wriggling now.

But yeah, the Fed has already done 500 basis points. That's five of your Earth percentage points of interest rate rises. And it looks like they do another quarter of a percentage point this week.

And then we're done. They're gonna sit back and gaze upon their works and say, can this be it? Do we have to do any more? How have we got inflation under control? The tricky thing is that humans have inflation expectations, consumers, people who rent houses, everybody has expectations around where prices are going to go. And so what the Fed will not want to happen is for everyone's inflation expectations to keep sailing higher. So what they're gonna have to do is say something along the lines of, okay, we're done for now. Here's another quarter of a percentage point of interest rate rises, but we are absolutely not done yet. We stand ready to act upon any signs of trouble. And so what you're quite likely to see is the market struggling to figure out which one is the key message from the Fed, I think.