Powell and Lagarde to markets: Hold your rate horses

All expectations that tightening signals by BoC and RBA would push the world’s biggest monetary policy actors to accelerate their own timelines for rate hikes ran into a wall with the U. S. Federal Reserve and European Central Bank saying they would not hike interest rates so fast.

Rate futures and bond markets on both sides of the Atlantic had been repricing for an earlier rate hike liftoff by the Fed and ECB over the last month in the face of an inflation impacted economic scene that is not heeding to policymakers’ transitory chorus.

ECB President Christine Lagarde signaled in no uncertain terms on Wednesday, hours before her U.S. Fed Chair Jerome Powell, was set to unveil his bank’s first step toward a post-pandemic policy.

“In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise,” Lagarde told an event in Lisbon.

“Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year”, she added.

Investors, until now cool to Lagarde’s previous soft-sell pushback on the matter, heeded, and pricing for the ECB’s next move, a 10 basis point increase, was pushed back from next October to December 2022.

Powell reinforced what Fed officials maintain is a clear distinction between the long anticipated taper of the Fed’s $120 billion a month of bond purchases to zero by mid-2022, announced as expected on Wednesday, and future rate hikes. His remarks at his post-meeting news conference signaled that Fed would stay patient and opted to await more job growth, before raising interest rates.