After a busy few weeks of headlines, there was relative calm this week in terms of financial market news.
However, we have seen the US Federal Reserve (Fed) fine tuning its messaging after last week’s rate setting meeting. Although Chair Jay Powell was at pains to point out that the rate cuts expected before the end of the year are far from guaranteed, some of his colleagues clearly see things differently.
Earlier in the week, the OECD published an updated global growth outlook, increasing their forecast for 2025 as a result of stronger-than-expected resilience, despite US tariffs. The organisation now forecasts global GDP growth of 3.2% in 2025, up from 2.9% in its June projection. Growth in the first half of 2025 was supported by front-loaded industrial production and trade, as businesses accelerated activity ahead of anticipated tariff increases. However, with labour markets softening across several economies and the effects of early export activity fading, the OECD still expects global growth to moderate to 2.9% in 2026, unchanged from its previous forecast. Among the G7 economies, the United States is projected to lead in 2026 with growth of 1.5%, followed by Canada (1.2%), Germany (1.1%) and the UK (1.0%). Other major economies – France (0.9%), Italy (0.6%) and Japan (0.5%) – are expected to grow more modestly. The OECD also highlighted the sharp rise in US import tariffs, estimating an average global rate of 19.5% as of August – the highest level since 1933 – but said the full economic impact of these is yet to be realised. The OECD also noted that downside risks to their outlook remain, including further increases in bilateral tariffs, a resurgence in inflationary pressures, heightened fiscal concerns and a potential repricing of risk in financial markets.
The economic data this week has been fairly light, though flash PMI data gave some insight to the direction of travel for western economies. The UK disappointed, with the composite PMI data falling to a four-month low of 51.0 in September versus 53.5 in August and an expected 53.0 (remember any survey reading above 50 points to economic expansion, any reading below 50 indicates contraction). The S&P PMI survey showed a ‘litany of worrying news’ for the UK including weakening growth, slumping overseas trade, worsening business confidence and further steep job losses. More positively, the survey did show signs of price pressures moderating. In the US, the S&P flash PMI data saw the composite figure slow to a still solid 53.6 from 54.6 in August (against expectations of 54.0). Within the survey, the pace of new orders slowed, job creation cooled and input costs climbed to a four-month high. The eurozone data improved slightly from August, with the composite at a 16-month high of 51.2 versus 51.0 previously. Manufacturing remained soft, with France and Germany still in ‘contraction’, but the services sector showed notable strength in Germany, up from 49.3 in August to 52.5 in September.
We heard from many Fed members over the course of the week, each offering further thoughts on their decision to cut interest rates by 25 basis points. Powell was adamant that the cut did not necessarily herald a run of monetary easing, saying further reductions in coming months are ‘not inevitable’. He said that balancing the risks of inflation and a weakening labour market made for a ‘challenging situation’, noting that ‘two-sided risks’ on inflation and the labour market mean ‘there is no risk-free path’. Vice Chair Michelle Bowman, known to be one of the more dovish members of the board, and a contender to replace Powell, conveyed more of a sense of urgency to support the jobs market, saying ‘it is time for the committee to act decisively and proactively to address decreasing labour market dynamism and emerging signs of fragility.’
But there was more caution elsewhere, including from Austen Goolsbee of the Chicago Federal Reserve, who said ‘with inflation having been over the target for four-and-a-half years in a row, and rising, I think we need to be a little careful with getting overly, up-front aggressive.’ Raphael Bostic of the Atlanta Fed echoed these views, saying ‘it’s incumbent upon us to continue to stay vigilant in the fight against inflation.’ Bostic told the Wall Street Journal he expected only one further rate cut this year given his ‘concern about the inflation that has been too high for a long time’. In contrast, recent Donald Trump appointee to the Fed board, Stephen Miran, called policy ‘very restrictive’ and said ‘the appropriate fed funds rate is in the mid two percent area’. Markets are currently pricing 39bps of cuts over the two remaining Fed meetings before the end of the year. If this does occur, rates would still be above 3%.
US Treasury Secretary, Scott Bessent, said earlier this week that he was interviewing 11 candidates for the role of Fed Chair. He said rates ‘need to come down’ and he was ‘a bit surprised that the chair hasn’t signalled that we have a destination before the end of the year of at least 100 to 150 basis points (lower).’
The appointment of a new Fed Chair, and conclusion to the legal process around the attempted firing of board member Lisa Cook, will be a key driver of sentiment in the coming months as investors assess the independence of a Federal Reserve that is likely to remain under significant pressure from the White House to loosen policy further. The short-term appointment of Miran, who remains a White House economic advisor, points to the type of candidate the Trump administration will attempt to install in the future. In theory, Powell stepping down as Chair is not the end of his tenure as a Fed Governor – his term ends in 2028, so there is scope for an intersting dynamic on the Fed board should the new Chair take a significantly different view from Powell and his incumbent colleagues. We would assume the new Chair will be someone with whom financial markets are familiar and comfortable, but they will inevitably be at the dovish end of the spectrum given the first criteria for the role will be a willingness to accelerate the loosening of monetary policy. It seems quite plausible that we will see far less consensus on policy than we are used to in recent years, with dovish leaning members – led by the new Chair – trying to force more aggressive rate cuts through.
If the Fed board comes to be seen as ‘less independent’ there is scope for further dollar weakness, bond market volatility (with yield curves steepening), and fallout in equity markets. Short-dated bonds will like the prospect of lower rates; longer-dated bonds may be spooked by concerns the central bank will be less disciplined in fighting inflation. Equities will struggle to balance the sugar rush of lower rates versus the risks of higher yields, as well as the potential economic volatility brought about by a central bank less likely to stand firm and take the tough policy decisions that put the economy, rather than politics, first.
Source: Columbia Threadneedle Investments as at 26 September 2025.
