Central banks – The end of guidance
Central banks are moving away from guidance. Warsh’s appearance at the ECB Forum on Central Banking in Sintra reinforced this shift. With uncertainty still high across growth, inflation and labour market dynamics, policymakers are increasingly reluctant to pre-commit to a clear path. For the ECB and the BoE, the message is one of careful ambiguity. Both institutions are keeping their options open and trying to prevent markets from interpreting their language as a foregone conclusion. The Fed, however, faces a more complicated communication challenge. Under Chair Warsh, the July meeting is likely to expose a “family fight” over whether rates should be hiked. Warsh explicitly refused to provide guidance at Sintra, leaving markets with greater uncertainty around the reaction function of the newly appointed Fed leadership. This marks a clear break from the more managed communication style of previous cycles: the Fed is no longer trying to smooth the path ahead for markets.
Fed – Summer hike gets tested
The case for a summer Fed hike has weakened, but it has not disappeared entirely. The latest labour market data came in softer than expected, with non-farm payrolls rising by only 57k and prior months being revised down by 74k, enough to ease pressure on the front end and take some heat out of the dollar. The details, however, were less dovish than the headline suggested. The unemployment rate fell to 4.2%, likely helped by lower participation, while wage and inflation dynamics remain important for the Fed’s reaction function. The report reduces the urgency to hike in July, but it does not fully close the debate. With a July hike now priced at only around 20%, a hold is increasingly becoming the market’s base case, but is not yet a foregone conclusion. The key point is that Warsh’s Fed appears unwilling to validate market pricing in advance. That keeps the July meeting live, even if the bar for a hike has risen.
Algebris Investments’ Global Credit Team
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