The summit between U.S. President Donald Trump and North Korean dictator Kim Jong Un produced nothing of import, apparently meeting financial market expectations for “much ado about nothing,” and all eyes on Wall Street have shifted to what I’m calling Central Bank Week. The U.S. Federal Reserve meets for two days, starting today, and is expected to raise its benchmark interest rate 25 basis points on Wednesday. The European Central Bank meets Thursday in Riga and there’s speculation that the bank will announce a date for ending its program of bond purchases six years after bank president Mario Draghi promised to do whatever it takes to rescue the euro. The Bank of Japan meets on Friday–it is expected to leave monetary policy unchanged.
That’s a lot of central bank uncertainty to price in for a single week.
The biggest uncertainties surround the Fed’s policy statement and press release on Wednesday. First, at a recent 3.8%, the unemployment is below the Fed’s longer term read on the point at which a tight job market starts to create big increases in wage inflation. Will the Fed change its target or say that it’s more worried about wage inflation. Second, the Fed has said that it believes that a 2.9% Fed funds rate would be market neutral (the effective Fed funds rate is now near 1.75%) and that, according to the DotPlot that surveys opinions of Fed officials, it is thinking about raising rates above that–to 3.4% in 2020. That would mean that monetary policy in 2020 would be slightly restrictive. Will that still be the Fed’s opinion in Wednesday’s DotPlot?
Turning to the European Central Bank, the question is has the crisis in Italy changed the bank’s opinion on when to end its buying of government and other debt. That program has kept EuroZone interest rates low and weakened the euro. A statement that puts a date to ending that bond buying would start to push up European interest rates and strengthen the euro against the U.S. dollar and other currencies.
Today, ahead of all these meetings, the markets have pretty much refused to budge. The Standard & Poor’s 500 stock index was up 0.13% as of 1:30 New York time. The Dow Jones Industrial Average was off 0.06%. The yield on the 10-year U.S. Treasury had moved up 1 basis point to 2.96%.