Fed pivots!

The Fed left interest rates unchanged following yesterday’s meeting, as expected, with Chair Powell saying rates have now probably peaked and the question of when to cut rates will be a topic of discussion at future meetings. Not surprisingly, this has led to a re-pricing of market expectations for the path of interest rates next year – a 25bps cut is now fully priced by March with a cumulative reduction of 150bps expected for 2024 as a whole – while US bond yields have plunged and the dollar has lost some ground. The latter has shed more than a cent to almost $1.09 against the euro and a bit more than half a cent to $1.262 against sterling, leaving EUR/£ slightly firmer again this morning at 86.2p.

In its post-meeting statement, the Fed said economic growth in the US has slowed from its strong pace in Q3, job gains have moderated, and inflation has eased over the past year. The Fed has lowered its forecasts for headline and core PCE inflation at the end of 2023 to 2.8% and 3.2% respectively, from 3.3% and 3.7% in its September projections, with both seen falling further to 2.4% by the end of next year, not far from the 2% target.

Attention now turns to the ECB and Bank of England interest rate announcements later today. Both are set to leave interest rates on hold, though there may be a couple of dissenting BoE votes in favour of a hike in UK rates. The expectation in the run-up to the ECB meeting has been that the central bank would push back on the prospect of rate cuts, certainly any early reduction, though the market may be wary whether this is now the case given what happened in relation to the Fed.

For the Bank of England, it will have welcomed this week’s data showing a deceleration in wage growth in the latest period. However wage growth still remains very elevated and inconsistent with achieving 2% inflation over time. With core CPI inflation also elevated (at almost 6%) albeit coming down, the BoE is likely to reiterate that interest rates will need to remain restrictive for an extended length of time .

Meanwhile, economic data due today includes retail sale, jobless claims and import prices, all in the US.