Bank of England “on hold” but US Federal Reserve cuts rates

Bank of England: On hold as expected, QT reduction, and November looking like a hold too

September’s “on hold” decision was very widely expected. The Monetary Policy Committee (MPC) chose to keep the policy rate at 4.00%.The Bank of England (BoE) have been on a gradual rate cut path, and November has been the next meeting date effectively seen as ‘live’ in terms of a rate move. On Thursday (18 September), the focus in terms of policy changes was on the bank’s annual quantitative tightening decision. 

Quantitative tightening (QT) decision – more active bond selling but skewing away from longs: The bank has decided to reduce the stock of government bonds held by £70bn over the next 12 months, so slowing the pace of balance sheet reduction from the previous £100bn and close to market expectations. That, however, implies a change in the mix between active and passive sales. Over the last 12 months £87bn of the £100bn were maturing holdings (i.e. balance sheet run-off or passive gilt sales), leaving £13bn of “active” sales. This time, active sales will be a higher £21bn. The bank has, however, also chosen to skew the selling away from longs – there had been some hope in markets that it might skew bond selling in this direction in light of demand challenges at the long-end and the relatively steep yield curve.  

Key language a little changed: The bank retains a rate cutting bias: “a gradual and careful approach to the further withdrawal of monetary policy restraint remained appropriate”. At face value, at least, that very much keeps the door open to a November rate cut.  Again, policy is “not on a pre-set path”. Again, “the timing and pace of future reductions in the restrictiveness of policy would depend on the extent to which underlying disinflationary pressures would continue to ease”.

Not much in the way of “dovish” signalling for November: In addition to sticking to their “gradual and careful” language, two MPC members (Swati Dhingra and Alan Taylor) voted for rates cuts (albeit one of them also voted for a 50bps rate cut). Of the seven who voted for an “on hold” decision, they noted limited economic news since the August meeting and no material changes in their views around risks and appropriate policy. The minutes do note though that among these seven there remained a range of views “about the balance of risks to inflation, and the most important factors contributing to it”. Partly because the MPC take a deeper look at the outlook at their February, May, August and November meetings and because of the “gradual” language, a vote to keep rates on hold at this meeting likely doesn’t mean that all these voters envisage voting again for “on hold” in November. However, the BoE is an inflation targeting central bank without a dual mandate (in contrast to the US Federal Reserve) and importantly the minutes also note that “in general, upside risks around medium-term inflationary pressures remained prominent in the Committee’s assessment”.

Some modest risk shifts signalled: The committee viewed that downside risks around economic activity remained but note that “there appeared, however, to be less of an immediate risk that the labour market would loosen very rapidly”. Underlying UK GDP growth remained subdued, but they are still uncertain about what that means in terms of the degree of slack that is opening up (and therefore the implication for underlying inflation pressures). The minutes note that “underlying disinflation had generally continued”, and that inflation is expected to fall towards target after rising in September, but they are still worried about risks of inflation persistence. They note in particular that some indications of inflation expectations had continued to increase over recent months.  

My central case forecast for one more rate cut from the Bank of England this year looks increasingly unlikely to be realised

Rate path expectations – November cut a tough call: My central case forecast for one more rate cut from the Bank of England this year looks increasingly unlikely to be realised. In August, the Governor clearly signalled that the path for rates had become more uncertain with a question over what course or period of time it takes. The economic activity data is not weak enough to force them into a rate cut and the actual inflation data – alongside pay growth and inflation expectations figures – seems too strong (for now) to give them comfort that they can worry less about upside inflation risks. With the late-November Budget likely to bring more fiscal tightening and the labour market soft, I still expect further rate cuts from the Bank against a forecast decline in core inflation. But a rate cut on 6th November looks too much of a stretch to retain as a central case right now.   

US: Fed cuts 25bps, but not so dovish

As expected, having been on hold throughout this year, the US Federal Reserve cut rates again. The driver of the decision to cut rates 25bps to a 4-4.25% range on Thursday (18 September) was, as anticipated, a different labour market assessment. From describing the labour market as “solid” in the July statement, this time around, “job gains have slowed, and the unemployment rate has edged up” and the Committee judges “that downside risks to employment have risen”. In the press conference, Chair Jerome Powell talked about there now being greater equality between their two goals (full employment and price stability) from having been very focused on inflation. He said this argued in favour of a move towards neutral rates. At one point in the press conference Chair Powell said that this could be viewed as a risk management cut. During the conference he said that, since April, the risks of higher more persistent inflation have become a little less, but on those labour market risks, Powell at one point described the current environment as a low hiring and firing one, but said that meant that, if layoffs step-up, that could quickly flow into higher unemployment. “We don’t want the labour market to soften further,” he said, “so we use our tools...It starts with a 25bps rate cut.”

The forecasts, however, don’t signal a Fed that is overly worried about the outlook. Firstly, real GDP growth forecasts are revised up a bit for 2025 through 2027 and the unemployment rate forecast is revised lower. Powell in the press conferences described the unemployment rate (more than once) as being at a low level and he said that “this is not a bad economy”. The inflation forecast is mostly unchanged but is revised up for 2026. The median participant forecasts for interest rates, meanwhile, are only a touch more dovish than in the last update in June, despite the very different picture being painted by recent labour market data…

…the policy path isn’t much different to how it looked in June. The policy rate path meanwhile has (only) one more cut in it compared to June. That extra cut is pencilled in for this year, so the median Federal Open Market Committee (FOMC) participant forecast is for two more cuts this year. The profile is then unchanged in terms of numbers of cuts, with one cut in 2026 and one cut in 2027.  

While they lined up to support a 25bps cut, the near-term dispersion of views looks wide. Perhaps surprisingly (given the apparent range of views ahead of the decision) there was only one dissent, new member Stephen Miran who preferred a 50bps cut. No-one voted to join him or to keep rates on hold. There is also a wide dispersion of views around the outlook on the Committee. One committee member (likely Miran) pencilled in more than 100bps of rate cuts this year, but almost half the FOMC expects only one or no further rate cuts in 2025.

I have been pencilling in one further rate cut this year and then a further two cuts. Current forecasts and commentary suggest that the balance of risks is firmly in the direction of a bit more than that.

No strongly dovish impression from Thursday’s meeting. Although the median forecast suggests a solid sequence of rate cuts ahead, Powell said that they are in a meeting-by-meeting situation. With all the above in mind, my impression from the Fed’s meeting was not especially dovish compared to June. I have been pencilling in one further rate cut this year and then a further two cuts. Current forecasts and commentary suggest that the balance of risks is firmly in the direction of a bit more than that. But much will hinge on the labour market and the further warning signs labour market data sends.   

Wouldn’t be drawn on political and independence questions. Chair Powell was (unsurprisingly) asked several questions about Fed independence but refused to be drawn, saying that they remain focused on achieving their goals and won’t be distracted from that. However, it was perhaps notable that while new appointee Miran voted for a 50bps cut Powell said that “there wasn’t widespread support at all” for a 50bps cut.

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice. Forward looking statements are subject to certain risks and uncertainties,  Actual outcomes may be materially different from those expressed or implied.