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The past two weeks have been awash with central bank meetings. While the decisions were dictated by different narratives across countries, almost all central banks were considering whether to lower rates further or whether to keep rates unchanged.
Ultimately, we have seen a wave of rate cuts by Canada (-25bps to 2.50%), Norway (-25bps to 4.00%), Indonesia (-25bps to 4.75%), Russia (-100bps to 17%) and Turkey (-250bps to 40.5%). Other central banks decided to keep rates unchanged, including in the Euro area (2.0%), UK (4.0%), Taiwan (2.0%), South Africa (7.0%), Brazil (15%) and Chile (4.75%).
Japan has been the only major country contemplating hiking rates. Nonetheless, this week they were always going to keep rates unchanged at 0.50% given the recent political instability and need for further signs that the recent pick-up in inflation would be sustained.
But who are we kidding? Not all central banks are created equal. The only game in town was in Washington, where the US Federal Reserve moved to cut rates by 25bps to 4.00-4.25%. This was the first cut by the Fed this year after 100bps of cuts between September and December 2024.
The cut by the Fed this week was never in doubt following a string of disappointing employment readings and hints by Fed Chair at the recent Jackson Hole conference. Rather the market’s focus was all about the communication from the Fed around the pace of further cuts to come. The Fed’s updated median forecasts revealed a further two cuts in 2025 to take rates to 3.6% by the end of the year, with a further cut expected in 2026 (to 3.4%) and another in 2027 (to 3.1%). This left rates 25bps lower than their June projections at the end of each year, although the Fed’s long-run view was left unchanged at 3.0%.
The decision by the Fed was couched around risk management considerations and the shifting balance of risks towards missing its full-employment mandate. Interestingly, this was not reflected in the Fed’s actual unemployment rate forecasts. Rather, the Fed’s median unemployment rate forecast remained unchanged at 4.5% for the end of 2025 but was downgraded by 10bps in both 2026 (to 4.4%) and 2027 (to 4.3%), while its new 2028 forecast came in at the long-run view of 4.2%.
The Fed also upgraded its year-ended real GDP growth forecasts to 1.6% for 2025 (was 1.4%), 1.8% for 2026 (was 1.6%) and 1.9% in 2027 (was 1.8%). The signal of a faster pace of cuts came despite a movement higher in the Fed’s inflation projections next year. Although the Fed’s core PCE inflation projections were unchanged for 2025 (at 3.1%), they were lifted in 2026 (from 2.4% to 2.6%) and remained unchanged at 2.1% in 2027. The Fed does not expect inflation to return to the 2.0% target until 2028.
Markets have clearly welcomed the Fed decision, with equity markets rallying to fresh record highs after the meeting. Bond markets were a little more circumspect with yields edging higher following the meeting, with the Fed’s projections suggesting higher rates in 2026 than implied by current market pricing.
Although we were a little surprised by the Fed’s downward revision to its unemployment rate forecast, the messaging delivered by the Fed was broadly as expected. Another rate cut by the Fed at its next meeting in October looks almost certain on risk management considerations, although we expect the December decision to be much more data dependent. By December, the Fed is likely to have more clarity on the pass-through of tariffs onto US consumers and inflation, while the risks around the labour market should also become clearer.
For now, equity markets appear to be supported by the prospect of further monetary easing by the Fed in coming months. However, markets are continuing to price in a faster pace of Fed easing in 2026 than signalled by the Fed, as evident by current market pricing for rates to fall to 2.9% by the end of 2026. With inflation expected to remain well above target next year, we are not convinced that the Fed would want to cut rates below neutral and into stimulatory territory, particularly if we start to see stabilisation in the labour market. Although Fed Chair Powell did not want to deliver any surprises this week, we wouldn’t be surprised to see the Fed pivot back towards focussing on inflation risks by late 2025 or early 2026, potentially delivering a hawkish surprise to the market.
