By the time the Federal Reserve (the Fed) met to discuss interest rates, it was no longer a case of will they or won’t they, but how much would they decide to cut by. The market was very much torn as to whether that cut would be by 0.25% or 0.50% and in the end they plumbed for the latter. This was the first rate cut seen in the US since March 2020, with rates having been held at the previous level since July 2023.

Whilst a move of this magnitude could have instilled a sense of panic in that the economic outlook is worse than expected, comments made by Chair Powell appear to have addressed those fears. A soft landing for the economy still appears the most expected outcome. Chair Powell was clear in pointing out that moves of 0.5% should not be considered the norm. He was also keen to infer that the Fed does not believe it is behind the curve in terms of lowering rates, but that a move of this magnitude can be seen as a commitment that they are not willing to fall behind the curve either. It perhaps suggests that the dual mandate of the Fed, in terms of managing inflation and employment, has fallen into a more balanced position.

The Fed also remained positive in their economic forecasting. They still predict that the US economy will grow by 2% this year and next. Whilst their prediction for unemployment has crept higher, to 4.4% from 4%, we know that the number of participants in the market has increased also. Inflation meanwhile is expected to be better behaved compared to previous forecasts, with their preferred measure expected to fall to 2.6% and then 2.2% in 2025. Despite this positivity we are still likely to see more rate cuts in the not too distant future. The Fed Dot Plot, which shows the interest rate expectations of the individual committee members, based on the median, suggests a further two 0.25% cuts before the end of the year. Further cuts could then come in 2025, bringing rates potentially down to between 3.25% and 3.5%. The equity and bond market responded positively to the move.

Elsewhere the Bank of Japan made no change to monetary policy, preferring to leave the rate at 0.25%, in line with the consensus forecast. Inflation grew 3% year on year, although the central bank will undoubtedly be keeping a close eye here, having risen 0.5% month on month, which was above the 0.3% forecast.

UK inflation also continues to behave well, with the consumer price index rising 2.2% year on year to August. Whilst still marginally above the 2% target, the Bank of England will be comfortable with this. Despite this, the decision was made to hold interest rates at 5%, in line with consensus expectations. There was one dissenter in the ranks who voted for a 0.25% cut. Whilst inflation is at 2.2%, the Bank will be very aware that inflation within the service sector remains much more elevated, at 5.6% in August. Whilst wage growth is falling, they perhaps need a little more convincing that high inflation in this cycle is beaten once and for all.

So, all in all, a soft landing for the economy remains favoured and markets like it. In a data dependent world, there will undoubtedly be a few bumps in the road, but hopefully the suspension holds up well.

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