Fed Risks Forcing a Failure to Land
The Federal Reserve’s forceful 50bp rate cut exceeded the 25bp that many economists had previously forecasted based on the recent data demonstrating economic resilience. However, underhand press communications in the lead-up to the decision had prepared markets for this more aggressive policy move. This pre-briefing also allowed economists to engage in policy-based evidence-making, whereby commentators cobble together justifications for an outcome that could easily look overtly political ahead of the US election. Markets were relatively little moved by the result, although rate pricing for the end of 2025 has retreated from its lows.
Overweighting political factors and fears of slowing demand, without proper consideration of supply and disinflationary slack, raise the risk of a policy mistake. Frontloading forceful easing could allow rates to accidentally fall below neutral, stimulating an erstwhile soft landing into no landing. Echoes of 1998 are reverberating loudly. Nor is a rapid reversal even hypothetical in the current global cycle. Mere hours after the Fed’s cut, Brazil’s Copom broke a few month pause in its previously steep cutting cycle with a rate hike. That turn is impressive given the global pressure from Fed easing, which helped to push Bank Indonesia into a surprise cut this week.
The BoE matched widespread expectations by holding the Bank rate at 5.00%, albeit with the lone dissent (Swati Dhingra) matching our relatively hawkish forecast. Little news was seen in UK indicators. Broadly reduced market rate paths and increased uncertainty around near-term global activity could not overcome cautious inertia. November was unsurprisingly identified as the occasion for the MPC to fully assess news, consistent with cuts aligning with MPR forecasts and the current consensus (see BoE Holds Gaze On November ).
On the data front, headline UK inflation was broadly unchanged in August. However, core and services inflation rebounded, shrinking the undershoot relative to the BoE’s last forecast. Airfares spiked, partly offset by ongoing weakness in hotel prices. Both should unwind in September. The median inflationary impulse sustained the most weakness since 2021. Another round of inflation-busting wage increases sustains underlying pressures. Energy prices will also stoke above-target inflation in 2025 but not prevent a BoE cut in Nov-24 (see UK Core CPI Strength Narrows ).
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Meanwhile, Euro area inflation’s headline slowing was broadly confirmed in the final release for August, along with the rise in services and sticky core inflation rates. Monthly median impulses are at or slightly above 2% again, as the previous lows look exaggerated. Other underlying measures are also settling excessively high. Falling petrol prices compound base effects to push September inflation down. The ECB is braced for a low outcome, so that need not bring forward a cut from December (see EA Inflation Fuelled To Dip Into Trough ).
Global inflation’s relative stability and predictability have reassured policymakers of their dovish forecasts, encouraging rate cuts despite some inconveniently resilient data. Historically, outcomes two years after slight surprises have still skewed higher. Below-target 2-year BoE forecasts have been three times as likely to surprise higher than lower. Realising persistently above-target inflation would match our forecast and ultimately truncate easing cycles. As such, recent forecast stability only matters in the dovish short term (see Forecast Stability Doesn’t Ensure Success ).