It has been a week dominated by monetary policy with sixteen central bank meetings taking place, including the US, UK and Japan. As anticipated, the Federal Reserve delivered a rate cut, while the Bank of England and Bank of Japan both kept rates on hold.
On Wednesday the Federal Reserve cut by 25 basis points, to a target range of 4-4.25%. This was the first rate cut this year, after the Fed paused cuts having trimmed rates by 100 basis points in the second half of 2024. The only dissent to the decision on the 12-person board was recent appointee and White House economic adviser Stephen Miran who voted for a 50 basis point cut. Economic projections released alongside the rate decision suggest the central bank anticipates two further 25 basis point rate cuts by the end of the year, a more dovish stance than the previous set of forecasts in June. Their forecasts revised higher expectations for growth and inflation, while employment was revised lower. 2025 GDP was upgraded to 1.6% from 1.4% previously; 2026 was increased from 1.6% to 1.8%. Unemployment is expected to be 4.5% this year and next. Inflation, as measured by Core PCE, is expected to be 3.1% this year and 2.6% in 2026, easing back to the 2% target by 2028.
Fed Chair Jay Powell framed the decision as a “risk management cut”, saying “the labour market has softened… the case for there being a persistent inflation outbreak is less”. Powell noted the recent pace of job creation appeared to be running below the breakeven rate needed for the unemployment rate to stay constant. While the labour market has shown signs of softening, the US economy remains in decent shape; the economy grew by over 3% in Q2 and similar levels are predicted for Q3, unemployment is low at 4.3% and equity markets are at all time highs. The Fed sees the risks to this benign backdrop as coming from the labour market – the press released dropped “solid” in regard to the health of the labour market, noting that the decision to act was based on “downside risks to the labour market have risen”.
This is a clear shift from the Fed from fighting inflation to balancing risks around employment and growth, with the Fed cutting rates now to pre-empt a larger rise in unemployment at a later date. The pressures that caused inflation to spike in 2022 – the tripling in the oil price and soaring rents and wages are absent and may actually be a disinflationary force in the coming months. But Powell still sees rate cuts as a ‘meeting by meeting situation” given his concerns over tariffs pushing inflation higher, which means despite the summary of economic projections pointing to further cuts, the incoming data will be key to guiding market expectations on when, and by how much further, the Fed will ease policy. We have now seen 125 basis points of rate cuts in the pat 12 months; the past four cycles this has happened in a year has been because of a recession, but we are now seeing cuts into an expected soft landing. Markets are still pricing almost five further 25 basis point reductions by the end of 2026, so either we follow this path, which points to a significantly weaker employment backdrop, or there is significantly less easing to come than markets expect.
The Bank of Japan kept rates unchanged for the fifth consecutive meeting at 0.5%, as expected. Some policy normalisation was announced with the start of the sale of some of the banks ETF holdings, with a book value of JPY 330 billion of ETF holdings to be sold in the next year. The bank judged that the Japanese economy had recovered moderately despite some areas of weakness and noted caution around global trade policies. Data showed core inflation easing for the third month in a row in August to 2.7%, the lowest level since last November. Two members of the nine-person committee voted for a rate hike; the first time Governor Ueda has seen a split decision.
In the UK, the Bank of England kept rates on hold at 4% with the MPC signalling it was in no hurry to loosen policy given concerns over lingering inflationary pressures. The MPC warned “upside risks around medium-term inflationary pressures remain prominent in the Committee’s assessment of the outlook”. Governor Andrew Bailey said “We’re not out of the woods yet so any future cuts will need to be made gradually and carefully,. The Bank also announced it would slow the pace of quantitative tightening, the process of selling down some of the £600 billion of government bonds still on their balance sheet. Holdings of UK government debt peaked at £875 billion in 2022, since when they have been reduced steadily but the bank will now reduce asset sales from £100 billion a year down to £70 billion a year. Bailey said the new QT target would allow the bank to continue to reduce the size of the balance sheet while “continuing to minimise the impact on gilt market conditions”. The £70 billion level of balance sheet reduction will involve £21 billion of actual sales of bonds, with the remainder of the balance sheet runoff occurring as bonds mature.
The UK inflation data for August, published this week, highlighted why the Bank remains in no hurry to ease policy. CPI climbed by 3.8% year on year, unchanged from July and in line with expectations. Core CPI, which excludes food and energy, was up 3.6% while services inflation, which has been extremely sticky, eased to 4.7% in August from 5.0% in July. UK inflation seems to be peaking in the 3.5-4.0% range with expectations that lower wage settlements and easing inflationary pressures will allow the Bank to cut rates in December or early next year. The UK unemployment data, also published this week showed the unemployment rate unchanged at 4.7% in the three months to the end of July. Payrolls declined further, by 8,000 in August, marking the seventh consecutive month where payrolls have contracted.
There was little respite for Rachel Reeves this week with the Financial Times reporting the Office for Budget Responsibility (OBR) has privately warned the Chancellor their estimates for productivity are likely to be downgraded ahead of the 26 November Budget, increasing the likelihood of the need for tax rises to fill a fiscal ‘black hole’. The OBR assumes trend productivity growth to average 1.1% over the medium term; a cut of 0.1 or 0.2 percentage points from the forecast would reduce the fiscal position between £9-18bn per J.P. Morgan estimates. The FT estimates the fiscal ‘black hole’ to be approaching £30bn. The government has previously pledged not to raise the ‘big four’ taxes, which make up 79% of tax revenues, amounting to £757bn in 2024-2025. The previous Budget in 2024 saw the Chancellor promise not to come back with more tax increases or extra borrowing. This pledge is looking increasingly fragile….
Source: Columbia Threadneedle Investments as at 19 September 2025.
