Is the Fed certain to cut interest rates next week?
Market Questions is the FT’s guide to the week ahead
The US Federal Reserve is all but certain to lower interest rates when it meets on Wednesday, leaving traders’ attention fixed instead on whether the central bank opts to bring to an end its three-year quantitative tightening programme.
Investors were already almost unanimous in expecting the Fed to lower rates by a quarter percentage point to 3.75-4 per cent, even before data on Friday showed US inflation rose to 3 per cent in September, below economists’ expectations of 3.1 per cent.
With a further rate cut fully priced in by the end of the year — borrowing costs were lowered for the first time this year in September — all eyes will be on whether Fed chair Jay Powell signals a halt to the central bank’s balance sheet run-off, a process known as QT.
The Fed began using massive purchases of assets to stimulate growth, a policy known as quantitative easing, in the aftermath of the global financial crisis and continued doing so with a few pauses until 2022. Since then it has moved in the opposite direction, shrinking its balance sheet by $2.2tn as it drains the reserves available for commercial banks to conduct their daily business.
Earlier this month, Powell said “some signs have begun to emerge that liquidity conditions are gradually tightening” as he signalled that QT could come to an end sooner than previously expected. A day later, the cost for banks to borrow overnight secured against Treasury bonds had one of the largest single day increases this year.
“When Powell said last week that QT will likely end ‘in coming months’ we heard this as December, which he may have meant, but developments since that speech lead us to think it is now more likely that the committee will just go ahead and end QT next week,” said JPMorgan analysts. George Steer
Will the ECB change interest rates on Thursday?
The European Central Bank is all but certain to leave its policy interest rate unchanged at 2 per cent on Thursday, as it plays for time to assess the impact of the transatlantic trade war on growth and inflation. Separating the signal from the noise will be a particular challenge due to a mixed bag of economic data.
In August, Germany’s industrial production collapsed to levels last seen in 2005 as exports dwindled. But business sentiment for the wider euro area is running at its highest level in 17 months, the HCOB Flash Eurozone Composite PMI showed on Friday. Meanwhile, Eurozone inflation rose to 2.2 per cent in September, above the ECB’s 2 per cent target for the first time since April.
“The data since the September meeting has generally been on the softer side, but not soft enough to change the outlook painted by the September projections,” Morgan Stanley economists wrote in a note to clients.
Pantheon Macroeconomics warned that there was “not much for the ECB to talk about next week”, adding: “All eyes on December.” Policymakers will hold their final meeting of the year on December 18, when ECB staff will present their updated growth and inflation forecasts — key inputs for the monetary policy decision. Olaf Storbeck
Will Takaichi’s victory delay a BoJ rate rise?
The Bank of Japan is widely expected to hold interest rates at 0.5 per cent at its next monetary policy meeting on October 29-30, following fiscal dove Sanae Takaichi’s surprise victory in the contest to replace outgoing Prime Minister Shigeru Ishiba this month.
Having kept interest rates at ultra-low levels for years, the BoJ has since March last year been gradually trying to raise the cost of borrowing in an attempt to normalise monetary policy.
It last raised rates in January this year, but US President Donald Trump’s “liberation day” tariffs then forced the central bank into an extended pause.
However, with a US-Japan trade deal finalised in July and hawkish signals from policymakers, by late September markets were pricing in a nearly 70 per cent chance of a rate increase in October.
Since then, there has been another twist. Takaichi’s unexpected win means BoJ policymakers are likely to put off any rise until they have greater clarity on her plans, analysts say.
“It makes sense for the BoJ to let the dust settle on the political and fiscal outlook before making the next move,” says Chris Scicluna, head of research at Daiwa Capital Markets.
Traders are now pricing in a more than 80 per cent chance that rates will remain on hold.
BoJ watchers will instead be focusing on forward guidance from governor Kazuo Ueda as well as fresh quarterly economic and inflation forecasts, which will be released alongside Thursday’s rate decision.
“Ueda is still likely to say that the BoJ is still ready to raise rates if the economy evolves as expected,” says Scicluna. “A December rate increase is still likely even if October is off the table.” Elettra Ardissino