Week of 3/24: Powell’s Patience, Currency Crisis in Nigeria, and the Weakening Yen

Welcome to "Worldview: Central Bank Insights" – your shortcut to understanding recent trends in global finance.

In this fourteenth episode, we delve into how Fed Chair Jerome Powell continues to say how the Fed shouldn’t rush rate cuts, then to how Nigeria hikes its interest rate to battle their high levels of inflation, and lastly Japan’s response to the weakening yen. 

Contact: 

Email: rabossong2@gmail.com

Transcript

Hello and welcome to the fourteenth episode of "Worldview: Central Bank Insights”. I am your host, Reagan Bossong, a freshman at the Wharton School of Finance, and it is my pleasure to guide you through another exploration of the largest stories regarding global financial dynamics over the past week. We will begin with an overview of general news from the US Fed, and then delve into a few stories about other central banks around the world. In today's discourse, we will begin by discussing how Fed Chair Jerome Powell continues to postulate how the Fed shouldn’t rush rate cuts, then to how Nigeria hikes its interest rate to battle their high levels of inflation, and lastly Japan’s response to the weakening yen. 

Federal Reserve Chair Jerome Powell reiterated that the US central bank is not in a hurry to cut interest rates, emphasizing the need for more evidence that inflation is contained. He stated that the solid pace of economic growth and a strong labor market provide the Fed with the opportunity to be more confident about inflation easing before considering rate cuts. While fresh inflation data aligns with the Fed's expectations, Powell emphasized that it would not be appropriate to lower rates until officials are certain that inflation is on track toward their 2% target. Investors are now betting that the first rate cut will likely occur in June. Powell highlighted that inflation is expected to continue falling on a "sometimes bumpy path," echoing comments made after the Fed's recent policy meeting. Fed officials held short-term interest rates at a more than two-decade high at that meeting, with a narrow majority projecting three rate cuts for 2024. Despite the easing inflation, Powell stated that the possibility of a recession is not currently elevated. However, he noted that an unexpected weakening in the labor market could warrant a policy response from the Fed. Overall, the Fed's approach to rate cuts remains cautious, with policymakers emphasizing the need for further evidence that inflation is moving toward their target before making any changes to borrowing costs.

Nigeria's central bank has raised its key interest rate by 200 basis points to 24.75% in its ongoing effort to combat sky-high inflation and stabilize the country's currency, the naira. This marks the second consecutive hike, following a 400 basis point increase in February. The decision to raise rates reflects policymakers' commitment to tackling inflation, which reached an annual rate of 31.7% in February, the highest level since April 1996. The central bank aims to restore its credibility and tame inflation, despite concerns about the impact of tighter monetary policy on economic growth. Governor Olayemi Cardoso emphasized the need for continued tightening to address runaway inflation, indicating that further rate hikes may be expected. Capital Economics expects additional 100 basis point hikes at each of the next meetings in May and July, with policy likely to remain on hold for the rest of the year thereafter. Nigeria's currency crisis has seen the naira plummet by around 70% against the U.S. dollar over the past year, hitting an all-time low in late February. The central bank's efforts to clear a $7 billion backlog of imports have helped the naira recover some ground, trading around 1,400 naira to the dollar as of Tuesday morning. The central bank's Monetary Policy Committee has expressed differing views on the drivers of inflation and naira weakness, leading to varied voting patterns. While some members advocated for smaller rate hikes, others emphasized the need to restore the bank's credibility and move real interest rates into positive territory to attract foreign investment and support the naira.

The Japanese yen has weakened significantly against the dollar, nearing its lowest level in 34 years, prompting increased warnings of possible market intervention by Japanese authorities. Finance minister Shunichi Suzuki emphasized that the government is prepared to take action against "any excessive moves" in the yen. Despite the Bank of Japan's recent shift from its ultra-loose monetary policy, including raising interest rates for the first time since 2007 and abandoning its negative interest rate policy, the yen's decline has continued. The central bank's governor, Kazuo Ueda, suggested that borrowing costs would not rise sharply due to unanchored inflation expectations, leading to a wider interest rate differential between Japan and the US, where the Federal Reserve plans to cut rates. Japanese officials have indicated that a yen level of ¥152 against the dollar could trigger direct intervention, similar to actions taken in September and October 2022. They believe that the recent weakening of the yen is not justified by the Bank of Japan's policy changes and may be driven by speculative trading. Masato Kanda, Japan's top currency official, warned speculators against further selling of the yen, stating that "all options" are being considered by the authorities. Analysts suggest that if the dollar-yen rate exceeds 152, the likelihood of intervention would significantly increase. If Japan decides to intervene, the initial intervention size could be limited, ranging from ¥2 trillion to ¥4 trillion, but could eventually total up to ¥12 trillion. Shusuke Yamada, head of Japan foreign exchange strategy at Bank of America, sees FX intervention as a realistic option for the Japanese government to address yen weakness.

So yeah, in conclusion, we began by discussing how Fed Chair Jerome Powell continues to say how the Fed shouldn’t rush rate cuts, then to Nigeria’s rate hikes to battle their inflation, and lastly Japan’s intervention in response to their weakening yen. As we continue to live throughout this financial landscape, the ripples of change will definitely continue being felt across economies worldwide. That’s a wrap for this week's central bank roundup. If you have topics you want me to dive into or thoughts on today's podcast, let me know anytime. You'll find all my contact details in the show notes. Until next time. Thank you!