Bank of England and Fed make moves

The Federal Reserve’s Federal Open Market Committee (FOMC) met this week against a backdrop of heightened economic uncertainty and mounting political pressure. In a long-awaited shift, policymakers on Wednesday announced a 25 basis-point rate cut — the first since December 2024 — bringing an end to a pause in monetary policy moves. The decision takes the federal funds target range down to 4-4.25%, its lowest level since 2022. 

The Fed’s updated projections support a path of gradual cuts through year-end, with policymakers updating their economic projections for two additional decreases this year and one apiece in 2026 and ’27. The cut in interest rates comes on the heels of new reports indicating a market slowdown in US hiring, while tariffs continue to exert only limited pressure on inflation.

Under pressure 

This week’s meeting was notable not just for its policy move but also for the tense political environment surrounding the central bank in the lead up. US President Donald Trump’s attempt to remove Federal Reserve Governor Lisa Cook — a decision which was blocked by a court ruling this week — and his repeated demands for Fed Chair Jerome Powell to endorse a more aggressive rate-cutting regime have loomed large in recent weeks, exposing the Fed’s potential vulnerability to short-term political interests.  

In a news conference following the announcement, Powell said the decision reflects a need to keep risks to the economy in line, describing it as a “risk management” cut. 

Stuck between the dots and a hard place

“The decision initially fueled a rally in the US Treasury market and a sell-off in the US dollar, which briefly took the euro to a four-year high, says John Sidawi, Senior Portfolio Manager, International Fixed Income. “However, these moves were both short-lived after Powell discussed the cut. His description clashed with Treasury and dollar valuations, as both had been pricing in a more aggressive easing path.”

Sidawi continued, saying that, “The jury is still out on this tug of war between US growth and inflation. The impact of global tariffs has yet to be fully realized, and the question whether fiscal impulses will be sufficient to offset the drag of import taxes remains a large unknown. Much to the dismay of the FX and interest-rate market, the direction of US monetary policy remains clear. But it was the journey that both markets mispriced yesterday.” 

Sue Hill, Head of Government Liquidity Solutions, Federated Hermes, notes that, while there was potential for drama, the FOMC meeting delivered few surprises: “As rate cuts go, this one was fairly painless. The market didn’t quite know how to interpret everything – with initial swings in both the bond and equity markets before the day ended largely unchanged. 

Elsewhere…

The Bank of England (BoE) announced on Thursday it would hold interest rates steady at 4%, following August’s 25 basis-point cut as it continues to fight above-target inflation. Figures released on Wednesday put UK inflation at 3.8% in the year to August. 

“There were no surprises from the Bank,” says Filippo Alloatti, Head of Financials, Federated Hermes, adding that rate cuts need be gradual and careful. “From here, a tricky balance of monetary and fiscal policy is needed to revive the country from subdued growth.”