US Fed Holds Rates, BoE Makes Its First Cut Since 2020

The US Fed held interest rates unchanged, while the BoE decreased its rates to 5%.

Key takeaways: 

• The Federal Reserve has maintained its current interest rate at 5.25-5.5%.

• Following this announcement, financial markets reacted positively. 

• The Bank of England cut the base interest rate from 5.25% to 5%, making for the first rate cut since March 2020.

• However, the interest figures for the BoE are nearly twice higher than the bank’s target of 2% per annum.

The Federal Reserve has maintained its current interest rate at 5.25-5.5%, but Federal Reserve Chair Jerome Powell has signalled a potential rate cut as early as September. This decision reflects the Fed's evolving approach to balancing inflation control with job market stability.

In a significant shift, the Fed's latest statement now considers risks to both inflation and employment, moving away from its previous focus solely on inflation concerns. Powell emphasized that future decisions will depend on incoming economic data, particularly trends in inflation and the job market.

Following this announcement, financial markets reacted positively. Treasury yields declined, the S&P 500 rose, and the dollar weakened. Market participants anticipate a 0.25% rate cut in September, though Powell dismissed speculation about a larger 0.5% cut.

The economic landscape presents a mixed picture. Inflation has been declining but remains above the Fed's 2% target. While still strong overall, the job market shows signs of cooling with slowing growth and a slight uptick in unemployment to 4.1% in June. Despite high interest rates, the U.S. economy continues to demonstrate strength, supported by robust consumer spending.

The Fed aims to achieve a "soft landing" - controlling inflation without triggering a recession. Their latest stance suggests increased caution regarding potential job market risks while seeing reduced inflation risks.

The market's expectations have aligned with the Fed's actions, from the slowing inflation rate to the accelerating cooldown in the labour market, which the Fed has increasingly emphasized recently.

As a result, there's a strong market consensus that the Fed will implement a rate cut at their September meeting. This anticipated move is likely to positively impact risk assets across the board and benefit treasury bonds as well.

However, it's important to remain cautious about the potential for a recession. The Fed's recent change in tone suggests growing concern about their ability to achieve a soft landing for the economy.

One last thing: Tech stocks have rebounded strongly, closing in positive figures, and the S&P 500 rose by 1.58%, marking its best performance during Fed day in 2 years. However, this surge is primarily attributed to robust earnings reports from AI companies like AMD and Samsung and news that the U.S. will exempt allies such as Japan and the Netherlands from FDPR rules. The Fed's announcement provided an additional boost to an already rising market.

Bank of England Cuts Interest Rates by 25 Basis Points to 5%

The Bank of England cut the base interest rate from 5.25% to 5%, making for the first rate cut since March 2020. This was after keeping the rates at a 16-year high for one year in a decision that came through a 5-4 split vote by the Monetary Policy Committee (MPC).  

The measure of inflation expectations and easing of inflationary pressures made it possible to implement this reduction, which represents a slight improvement in economic development and stability.  

However, there are still concerns over the core inflation rates being above the Bank’s expectations. Nonetheless, services inflation was recorded to be at 5.7% in June, with the annual wage growth matching the figure—two figures nearly twice higher than the bank’s target of 2% per annum. The above data shows a continuation of inflationary tendencies, although the overall economic growth rates show a more positive picture.  

However, the Bank of England expects inflation to slightly rise in the coming months due to wage increases, service prices, and still-tight labor market conditions.