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The Federal Reserve is widely expected to lower interest rates by a quarter of a percentage point next week, in what would be the US central bank’s first cut since December.
Traders have fully priced in a 0.25 percentage point cut for Wednesday’s meeting of the Fed’s policy-setting Federal Open Market Committee, which will come just days after Fed governor Lisa Cook won her initial case against President Donald Trump’s attempt to fire her.
Following that ruling, the Trump administration asked a US appeals court to allow the president to sack Cook, who has been accused of mortgage fraud, before the FOMC begins its two-day meeting on Tuesday. Her lawyers argue the attempted dismissal is premised on “an unsubstantiated allegation”
Trump’s attacks on Cook and Fed chair Jay Powell, who he has labelled a “stubborn mule” for not lowering rates sooner, have sparked concerns among investors and academics that a potentially politicised central bank, in thrall to the president’s desire for sharply lower rates, would struggle to keep inflation in check.
“Trump’s influence on the Fed is likely to increase as the number of Trump loyalists on the board rises, particularly if Lisa Cook is forced to resign,” said Rabobank analysts.
Concerns about the inflationary impact of tariffs and slowing jobs growth have dominated economists’ attention in recent weeks.
Yet Thursday’s consumer price index from the Bureau of Labor Statistics, whose commissioner was fired by Trump in August after a gloomy jobs report, provided little immediate cause for concern.
US inflation rose to an annual rate of 2.9 per cent in August, above July’s 2.7 per cent but in line with the consensus forecast by analysts in a Bloomberg poll. Core inflation held steady at 3.1 per cent. George Steer
Will the BoE slow the pace of gilt sales?
With financial markets expecting the Bank of England to keep interest rates at 4 per cent at its monetary policy meeting on September 18, attention will focus on forward guidance and the pace of so-called quantitative tightening.
The BoE’s Monetary Policy Committee will set the pace of the central bank’s balance sheet reduction for the year starting in October, having voted to shrink its gilts holdings by £100bn in each of the past two years. This time, analysts see a strong case for a slower pace.
Gilt yields are under pressure and, with fewer bonds maturing in the year ahead than previously, maintaining the pace would require stepping up active sales.
“We believe the most likely outcome . . . is that the MPC will lower next year’s target to around £75bn, but there’s a chance the MPC may opt to go even further,” said Edward Allenby, economist at Oxford Economics.
This would broadly align with the BoE’s market participants survey, which points to a consensus expectation of £72bn.
As for interest rates, the BoE adopted a cautious tone in August, highlighting concerns about the risk of above-target inflation persisting. Markets have all but discounted the chances of a rate cut on Thursday and anticipate only one 0.25 percentage point cut before the end of March next year.
Investors will look for any change in guidance in case the BoE thinks the market is underpricing the chances of a cut. Governor Andrew Bailey may remind traders that rates are not on a preset path and the direction of travel is still down, for example.
But August inflation data due on Wednesday could yet shape expectations. Economists polled by Reuters expect annual consumer price growth in the UK to have been 3.9 per cent, up from 3.8 per cent in July and well above the BoE’s 2 per cent target. Valentina Romei
Will Canada resume its rate cutting cycle?
The Bank of Canada is expected to cut interest rates on Wednesday as the economy falters and unemployment rises, having held rates steady at its last three policy meetings following two cuts early this year. Policymakers will pay close attention to inflation data due the day before their meeting.
Traders are putting a 90 per cent chance on a quarter-point reduction that would bring the policy rate to 2.5 per cent from its current 2.75 per cent, with a 10 per cent chance of no change.
Nevertheless, analysts at the Royal Bank of Canada said they expected the BoC to “narrowly opt for a hold”. Claire Fan, an RBC economist, said Tuesday’s inflation data would “bear an unusual amount of weight” for policymakers ahead of their decision.
Canada’s statistics office said this month that unemployment had climbed to 7.1 per cent, a new cycle high. Last month, it said the economy had contracted at an annualised pace of 1.6 per cent in the second quarter.
Economists say the weak labour market, soft business investment and pressure from tariffs were all fuelling expectations of looser policy.
“We have long expected two more cuts this year, with the next inflation report likely to help cement the timing of the next cut,” said TD Bank senior economist Leslie Preston.
Inflation has been in the BoC’s preferred range, but governor Tiff Macklem faces the challenge of re-anchoring inflation around the bank’s 2 per cent target while also supporting growth. Ilya Gridneff
