Unknowns cloud major central banks’ forward guidance

Significance

The Fed insists that subsequent moves will depend on economic developments, but its forecast implies that, although not imminent, another 25-basis-point (bp) increase will happen. Divergence between the US, EU and Chinese economies is making financial markets volatile.

Impacts

• US mortgage rates are above 7% but the dominance of 30-year fixed-rate mortgages is cushioning the impact on housing market activity.
• Major central banks’ ‘higher for longer’ stances will strain emerging market (EM) bond markets as investors unwind sharp EM rate cut bets.
• The calming of Japanese inflation, and the central bank's reluctance to end ultra-loose policy, is quelling expectations of rate rises soon.