This week's central bank meetings played out broadly in line with expectations. The Fed, Bank of Canada and Norges Bank all cut by 25bps. Meanwhile, the Bank of England and Bank of Japan remained on hold. Price action was patchy across equities and in the major FX pairs, while movements in fixed income were contained. The major theme to come out of the week is that the Fed confirmed its focus has turned to supporting a softening labour market as it opened the door for a series of further rate cuts - a shift markets have been anticipating for some time.
Rising risks around the US labour market saw the Fed resume its easing cycle, cutting rates for the first time this year by 25bps to 4-4.25%. Speaking at the post-meeting press conference, Chair Powell said this was a 'risk management' exercise that moved rates 'toward a more neutral policy stance'. The key area of concern is the labour market. Headline unemployment in the US is at 4.3% as of August, and Fed officials at this week's meeting forecast it to rise to 4.5% by year-end, with Chair Powell saying that the pace of hiring had fallen below the 'breakeven' level needed to prevent unemployment from rising. Accordingly, an additional rate cut was added to the forecast profile, now pointing towards 2 further cuts this year to the 3.5-3.75% range.
While the reaction function is now being driven by the employment side of the Fed's dual mandate, inflation risks have not disappeared. Chair Powell said the risks to inflation were 'tilted to the upside' with uncertainty around the durational effect of tariffs on prices. The broad view is that tariffs are likely to have a relatively short-term impact on inflation, but it is wary of a scenario in which rising prices (particularly for goods) leads to renewed inflationary pressures.
The Bank of England's MPC left interest rates on hold at 4% in a largely predictable meeting this week. It also decided to slow the pace of quantitative tightening (QT) from £100bn to £70 over the next 12 months, aimed at easing pressure at the long end of the gilt market. Both decisions were voted through on 7-2 majorities. On rates, the MPC reverted to holding steady after cutting at the previous meeting, sticking to a sequence it has maintained since August last year. Rates have fallen by 125bps over that period, and indications are that the easing cycle has further to run as the MPC retaining its longstanding guidance to cut rates taking a 'gradual and careful approach'.
Markets have interpreted that as Bank Rate finding a landing point down around 3.5% by mid next year. The MPC's overall view is that conditions are finely balanced; on the one hand, it sees downside risks to growth and the labour market, while on the other there are upside risks around the inflation outlook. That comes as August's inflation readings remained elevated, with headline CPI holding at 3.8%yr and the core measure printing at 3.6%yr from 3.8%. Very influential to the latter, services inflation was 4.7%yr from a prior pace of 5%.
Australia's unemployment rate remained at 4.2% in August, despite employment unexpectedly falling by 5.4k in the month against forecasts for a 21k rise (see here). A fall in the participation rate to 66.8% after 3 months at 67% meant the decline in employment was broadly offset by a decline in the labour force, holding the unemployment rate unchanged. However, the tone of the report was weak, reaffirming pricing for the RBA to continue cutting rates. Markets see the cash rate declining by a further 50bps by early next year.
