December’s meeting of the FOMC proved somewhat more hawkish than investors expected, and market pricing now sees the federal funds interest rate at 4% by the end of 2025. This follows something of a roller coaster year, with expectations peaking at over 4% in April before dropping below 3% in August, when increasing signs of labour market weakness were the primary concern. Now, with sticky inflation and continued job market gains, committee members have moved their focus to the inflation side of their dual mandate. In the meeting that finished on December 18, the median voter upgraded their view (relative

Last week the US Federal Reserve surprised economists by cutting interest rates by 50 basis points, instead of the widely expected 25. The Fed, with this move, has initiated its first rate-cutting cycle in four years, last observed when the central bank was forced to cut rates to zero amidst the onset of the COVID-19 pandemic. As detailed by Fed Chair, Jerome Powell, the reason behind this surprising move was a need to compensate for the Fed’s decision to keep rates on hold at their previous meeting, when weak labour market data was yet to be released and the indication

The FOMC meets next week, faced with an economy facing downside risks to the labour market but still-firm inflation. That they will cut interest rates is not really in question. The Chair widely flagged such a move last month, noting that “the time has come for policy to adjust”. However, he noted that the “timing and pace of cuts” will depend on an “evolving outlook” and the “balance of risks”. While there have been clear signs of labour market softness, this week’s inflation reading was a reminder that upward price pressures persist. The fed funds rate in 2025, which is

The Bank of England joined the group of central banks that have cut interest rates this year when it trimmed Bank Rate from 5.25% to 5.0% on 1 August. The Federal Reserve, meanwhile, left the fed funds rate unchanged when it concluded its two-day meeting a day earlier. Jerome Powell did, however, indicate that a reduction may be on the cards soon. But when the Fed does start cutting rates, how gradually and how far will it go – and what are the implications for investors? Previous Fed rate-cutting episodes may not offer that many clues. The length of rate-cutting

There is a paradox in the state of the US economy that is creating something of a conundrum for decision-makers. On the one hand, the US economy has shown resilience in the face of higher rates, while inflation has proved to be stickier than expected. It is therefore almost certain that the FOMC will keep the federal funds rate unchanged when it concludes its two-day meeting on 1 May. Even the 2024 Q1 GDP report, which showed weaker-than-expected growth of 1.6%, annualised, dampened investors’ expectations of rate cuts: Treasury yields increased in response to the release, as the detail showed

Back in March 2022 when the Fed embarked on its second most aggressive hiking cycle ever, we warned that it would not be the first hike that created risk, but that the risks would probably surface after the Fed had delivered its final hike. That last hike appears to have happened: so where are we now? With inflation down and economic activity re-accelerating, the Fed seems set on maintaining rates at current cyclical highs for longer than the market had expected and hoped just a few weeks ago. Despite the abrupt departure from years of zero rate policy, the economy

The Federal Reserve left interest rates unchanged on 31 January, and the Fed chairman crushed hopes of rate cuts at its next meeting in March. Jerome Powell could not have provided clearer guidance to that end, stating: “[A cut] is not the most likely case or the base case.” His comments triggered a large risk-off move, with equity investors selling off to rectify their previously bullish allocations based on a strong belief in March rate cuts. US equity indices promptly took the kind of beating they have not seen in a long while, with the S&P 500 closing 1.52% lower

Last week’s signals from the Federal Reserve and European Central Bank that their rate-hiking cycles are set to continue in July was not sufficient to end a three-month rally in US equities, nor to prompt a material rise in implied volatility. Economies have proved far more resilient to rate hikes than many had anticipated, with even a mini-banking crisis in March failing to light the recessionary touchpaper. This resilience has caused the VIX Index, the leading indicator of market uncertainty, to fall to its lowest level in three years and well below its average since 1990 of 19.6. Equity markets

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG. Fathom revised up its US interest rate forecasts late last month, pushing up the probability-weighted path for the federal funds rate in the near term. As always, we present our clients with a distribution of possible outcomes for the federal funds rate, and for other macroeconomic and financial market variables, based on scenarios.[1] The mean outcome across our three scenarios was for the US policy rate to peak at a little under 3% by the beginning of next year, before

Despite the surprise 1.4% contraction in the US economy in the first quarter, the US labour market remained very strong in April. Nonfarm payrolls increased by 428K, with private service-providing and manufacturing jobs up 340K and 55K respectively. The three-month average gain in nonfarm jobs is a very solid 523K. The unemployment rate remained extremely low at 3.6%, although it was flattered by a 0.2% decline in the labour force participation rate. Average hourly earnings growth remained robust at 5.5% on a twelve-month basis. Amid very high inflation and a robust jobs market, the Federal Reserve stepped up the pace

Last week brought further evidence of soaring US inflation. The Personal Consumption Expenditures (PCE) deflator rose from 4.4% on a year-on-year basis to 5% in October — its highest level since November 1990. Core PCE inflation, which excludes food and energy items, rose four-tenths to 4.1% — its highest since January 1991. This is well in excess of the Federal Reserve’s 2% target. Adding to risks on the inflation front, producer price inflation remains very elevated and there is further evidence of a red-hot labour market. In the latest week, initial jobless claims fell to their lowest since 1969, a

Most agree on a positive association between the equity earnings yield and the bond yield for two reasons. First, equities and bonds are competing for investor capital. Hence, when the bond yield increases, the equity price should fall so that the earnings yield increases to preserve the competitiveness of equities. Second, the equity price is the sum of its discounted present value future cash flows. Therefore, when interest rates fall, present values rise to decrease the equity earnings yield. These mechanisms are encapsulated by the ‘Fed model’, which states that, in equilibrium, equity earnings yield should be equal to the