Key Takeaways
The Federal Reserve looks set to cut interest rates this week.
Market expectations are divided between a 25 or 50bps move. Lack of clear pre-meeting guidance suggests that the rate-setting committee is also divided.
Continued growth and falling inflation suggest that the economy is on for a soft landing.
The Bank of England’s Monetary Policy Committee also meets this week but no cut is expected.
Attention is firmly fixed on the meeting by the Federal Reserve rate-setting committee and the associated press conference on Wednesday. Whatever the outcome, the markets will move. There is no doubt that the Fed will cut rates, the question is whether it’s a 25 or 50 bps move. And the markets are divided: pricing is for a 40-bps cut so, one way or another, it’ll be a surprise. Moreover, the market has priced in a whopping 120 bps of cuts this year. There are only two meetings left this year after this one so if the cut is only 25 bps, this would require consecutive 50 bps cuts. Highly unlikely.
It is unusual for the Fed to leave the market guessing to this extent ahead of the meeting, especially so close to the US Presidential election. I can only presume that the committee itself is split so their press office was unable to give clear guidance.
A 50-bps cut would probably mean that both bonds and equities rally, if it’s only 25, they may well both sell off. It’s hard to see the market pricing in much more for cuts next year: a cumulative total of 250 bps taking official rates down to 2¾% but if the cut is only 25 bps, that number would probably come down.
Taking a step back, the US is en route for a soft landing with continued growth in the US and elsewhere together with falling inflation. That’s a good background for risk assets but there’s a lot priced in for equities too in terms of earnings growth, especially for the ‘Magnificent 7’.
The Fed are not the only central bank meeting this week, the Bank of England (BoE) meet on Thursday. No one seriously expects a cut but the vote will be closely watched. Uber dove Swati Dhingra will no doubt vote for a cut but if she’s the only one, that would be taken negatively. 7:2 would probably be neutral, 6:3 positive. The problem for the UK is that although wages and services inflation is slowing, it’s still far too high. The inflation data, also out this week, will give us further clues as to the progress. But the message is that the BoE will be cautious in cutting rates with the next move likely to be 25 bps in November.
