A Cut, A Hold, and the Double Conundrum
The Fed’s decision to cut interest rates by 25bps, to a range of 4.00-4.25%, marks a clear dovish pivot, with policymakers signalling a greater focus on the labour market. The first reduction of the year was nearly unanimous, with the sole dissent coming from newly installed Governor Stephen Miran, a close ally of Donald Trump, who (surprise, surprise) advocated for a more aggressive half-point cut.
This move highlights a notable divergence in views in the outlook for rates. The latest "dot plot" projections show the median view for two more cuts this year, a more aggressive stance than previously held. However, a significant number of officials still see no further cuts this year, underscoring deep divisions on the committee and a stark disconnect from the Trump administration's public calls to “get interest rates down to ZERO, or less”.
At his presser, Fed Chair Powell, acknowledged the difficult trade-offs facing the central bank, stating, "It's challenging to know what to do," and "There are no risk-free paths now." This shift, from a previous focus on combating tariff-driven inflation to addressing a weakening employment picture, represents a significant change in the Fed's "reaction function".
The focus now shifts to the Bank of England's (BoE) meeting later today. While a hold is widely anticipated, the recent economic data presents a mixed and challenging picture for policymakers. August's UK inflation rate held steady at 3.8%, well above the central bank’s 2% target, driven by a pick-up in food and services inflation. At the same time, the labour market has shown signs of softening, with the unemployment rate standing at 4.7% and wage growth remaining elevated. The BoE has already embarked on a "gradual and careful" rate-cutting path, with the most recent 25bps cut in August bringing the rate to 4%. The MPC is now faced with a similar dilemma to the Fed, balancing the risk of a weakening economy against the need to bring persistent inflation under control.
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