US equity declines stabilised this week amid a less volatile flow of tariff-related headlines. Central bank meetings all going to script with unchanged policy stances from the Fed, BoE, BoJ and Riksbank was also a factor, while the 25bps cut from the SNB was largely expected. ECB President Lagarde told the EU parliament that a tit-for-tat exchange of 25% tariffs with the US could deduct up to 0.5ppt from euro area growth and may raise inflation by around 0.5ppt; although those factors would be a clear negative, market optimism towards the euro area remains buoyed by Germany's fiscal reforms, which passed through the parliament this week.
A largely uneventful Fed meeting saw the Committee reaffirming its message to remain patient in reacting to the concerns markets are expressing over the US growth outlook. Rates were left on hold (4.25-4.5%) for the second meeting in succession as the signalling for two rate cuts by year-end was maintained in the updated Summary of Economic Projections (SEP). The one change made by the Fed this week was to slow the pace of reducing its balance sheet, a pre-emptive move to avoid the risk of money markets seizing up as they did during the last quantitative tightening process in 2019. From April, the redemption cap on Treasury holdings declines from $25bn to $5bn per month; the lower cap meaning more of the principal the Fed receives from maturing bonds each month - amounts in excess of the cap - will be reinvested in the Treasury market going forward.
With heightened uncertainty clouding the outlook for the US economy, one of Chair Powell's main messages in the post-meeting press conference was that monetary policy was 'in a good place' to respond as the haze clears. The provisional view of the Fed in the SEP is for weaker growth and higher inflation near term, which incorporates some of the expected impact of tariffs. Growth this year was downgraded from 2.1% to 1.7% while inflation on the core PCE deflator was lifted from 2.5% to 2.8%. That combination is set to keep the Fed on the sidelines, and although the sense is the Fed remains on an easing path, markets do not see that as being a decisive enough factor to offset the current malaise.
In London, the Bank of England held Bank Rate steady at 4.5% in an 8-1 vote; MPC member Dhingra casting the sole vote to cut by 25bps, as member Mann sided with the consensus after voting (with Dhingra) for a 50bps cut in February. This meeting was largely a placeholder event, falling between the quarterly 'forecast' meetings at which the BoE has been sequencing its earlier rate cuts. Accordingly, the BoE retained its guidance for taking a 'gradual and careful' approach to the easing cycle, leaving market pricing for an additional 50bps of cuts by year-end intact. Next week's key budget update is set to be of much greater significance for UK assets, with reduced fiscal headroom leaving the government to consider either spending cuts or tax increases.
Domestically, fiscal policy is also in focus with the federal budget to be handed down next week. Being a pre-election budget, there is likely to be an extension of cost-of-living measures and spending on key areas including health, defence and infrastructure is set to remain elevated. This week, the February Labour Force Survey delivered a shock reporting a near 53k decline in employment against an expected rise of 30k from workers commencing new roles post holidays (reviewed here). The outcome looks to be an aberration as the ABS identified a wave of retirements came into effect in early 2025, resulting also in labour force participation declining sharply from record highs to 66.8% in February. No change in the unemployment rate at 4.1% and slight declines in underemployment (5.9%) and underutilisation (9.9%) continue to point to solid underlying labour market conditions.
