It was a week of unconvincing moves across markets as a clear narrative failed to emerge from the key Fed meeting. Rates were cut by 25bps - and the forecasts for further easing were retained - but divisions on the FOMC and a void of data are creating uncertainty. Overall, the US curve steepened, though more hawkish rate expectations elsewhere - most notably in Australia and the BoC holding steady - meant the USD was softer. Tech and AI-related plays continued to weigh on equities. Key events next week include November payrolls (Tuesday) and CPI (Thursday) in the US, and policy meetings for the ECB, BoE (Thursday) and BoJ (Friday).
Ongoing concerns over the US labour market saw the Fed's FOMC cut rates by a further 25bps this week to a 3.5%-3.75% range. This was the third cut in succession, with rates now down by 175bps across the easing cycle since September last year. The divisions of policymakers' views remained a key focus coming out of the meeting: Miran voted for a 50bps cut while two others (Goolsbee and Schmid) objected to any cut at all, raising uncertainty over the path for rates.
However, the updated dot plot still implies one further rate cut in 2026 and 2027 as the median forecast, despite expectations for a more optimistic economic outlook. Stronger growth is now anticipated in 2026 (2.3% from 1.8%) and 2027 (2% from 1.9%), reflecting the resilience of the US economy - though the forecasts for inflation in 2026 were lowered (headline PCE 2.4% from 2.6%, core PCE 2.5% from 2.6%), as was the unemployment rate in 2027 (4.2% from 4.3%).
At the post-meeting press conference, Chair Powell said the current labour market conditions - higher unemployment rate and slowing employment - warranted easing policy. This is reinforced by the view that payrolls data are overstating employment gains by around 60k per month. Although inflation remains elevated to the 2% target, the FOMC's interpretation is that the overshoot is due largely to trade tariffs. This is seen as having a short-term impact on prices rather than sparking a renewed inflationary episode.
Attention in the euro area turns to next week's ECB meeting with the Governing Council firmly expected to remain on hold, while in the UK the BoE is likely to cut rates by 25bps. Speaking with FT in London, ECB President Lagarde reaffimed rates remained 'in a good place' and that growth and inflation forecasts could be revised higher next week - perhaps a quiet nod to markets that have recently priced out any further rate cuts.
The BoE's decision seemingly hinges on Governor Bailey switching his vote to support a cut, after the MPC was split 5-4 in favour of holding last time out. The missing piece of the puzzle then was the UK Budget, but the measures subsequently handed down by Chancellor Reeves in late November failed to alter a subdued growth outlook, proving no hurdle to a rate cut.
In Australia, the RBA left the cash rate at 3.6% in a hawkish hold as the policy board highlighted increased risks around the inflation outlook (reviewed here). As such, the decision statement and Governor Bullock's press conference effectively communicated the easing cycle had run its course, and markets took this as a green light to price in 50bps of rate hikes in 2026.
However, a weak labour force report for November has given markets something to think about over the summer break. Employment fell by 21.3k in the month, posting its weakest result in 9 months to defy expectations for a 20k rise (reviewed here). The unemployment rate clung on to remain unchanged at 4.3%, but that was only due to a decline in labour force participation from 66.9% to 66.7%.
