18 December 2024
If you are covering the Federal Reserve's latest interest rate decision, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
“The Federal Reserve has moved to cut rates by 25bps, as was widely expected by the market. However, alongside this cut there were signals that the Fed will proceed with caution in 2025, with inflationary forecasts raised in the December projections.
“On the face of it, there is a conundrum in central banks that has led the Fed to this decision, despite core month on month CPI being stuck at 0.3% for four months in a row while GDP growth has remained strong.
“Meanwhile, the Bank of England is expected to hold rates at 4.75% tomorrow even though growth has slipped into reverse. UK GDP contracted 0.1% in each of the past 2 months, while core month on month CPI was 0% in November, down from 0.4% in October.
“So, why has the Fed cut while the Bank of England is expected to hold? When we pick over the inflation data, there are a few differences that offer some explanation. Firstly, while both economies are still facing wage inflation well above the target rate, productivity – a measure of output per worker – is far weaker in the UK and has largely flatlined since the pandemic whereas in the US it has shown strong gains. This makes wage growth more inflationary in the UK than the US, because higher wages lead to higher demand, but with no offsetting increase in supply causing the price level to move up.
“Another possible factor is that the Federal Reserve tends to act based on data prints, rather than considering forward looking signals from Donald Trump’s range of policy intentions which may or may not materialise. In being arguably late to cut in the first place, the Fed is also perceived to be playing a degree of catch up. However, investors had been braced for a more hawkish tone going into 2025, and that too has materialised. Potential inflationary pressures ahead including Trump’s tariffs, immigration controls and personal and corporate tax cuts are expected to see a shallower path of easing in future months.
“In the UK, there is the sense that the economy is slipping into stall speed, and there is an argument for a rate cut tomorrow to close out the year. However, the Bank of England has been particularly cautious about persistent wage inflation combined with weak productivity, with a single mandate being focussed on price stability. While its Deputy Governor Sir Dave Ramsden has argued that wage inflation is likely to be at the lower end of the 2-4% range next year, with other factors such as the recent Budget suggesting employers will be reluctant to see wage costs rise even further, the MPC are going to be under increasing pressure to act sooner rather than later.”
