Key events
Asia-Pacific markets rally after Fed rate cut
Wall Street closed slightly lower last night, after the Fed delivered its half-point cut to US interest rates.
The S&P 500 shares index dipped by 0.3% by the end of trading, down 16 points at 5,618 points.
Asia-Pacific markets, though, are rallying today. Japan’s Nikkei has gained 2.1%, Hong Kong’s Hang Seng index is 1.9% higher, and China’s CSI300 index is up 0.8%.
Stephen Innes, managing partner at SPI Asset Management, says investors are hopeful that other central banks might follow the Fed’s lead and cut interest rates:
Asia’s markets are riding high, as the ripple effect from the Fed’s jumbo rate cut suggests it’ll be much easier for central banks across the region to cut rates, potentially fueling growth and boosting equity market valuations.
With the Fed taking the plunge, these more cautious central banks may finally feel encouraged to join the rate-cut party.
Donald Trump says Fed’s half-point rate cut may be ‘playing politics’
Last night, Fed chair Jerome Powell insisted that the Fed’s large rate cut had nothing to do with the US election.
As we blogged last night, he told reporters:
“This is my fourth presidential election at the Fed and it’s always the same. We’re going into this meeting in particular and asking what the right thing to do for the people we serve. And we do that and we make a decision as a group and then we announce it.
That’s always what it is, it is never about anything else.”
But one presidential candidate doesn’t sound convinced. Donald Trump argued that the scale of the cut – a full half percent – showed the US economy was either “very bad” or the central bank was “playing politics.”
He told reporters:
“To cut it by that much, assuming they’re not just playing politics, the economy would be very bad.”
Trump nominated Powell to be Fed chair in 2017, but then swiftly fell out with him, claiming the Fed was hiking interest rates to harm the economy during his term in office.
Introduction: Bank of England interest rate decision today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
After a hefty interest rate cut in the US last night, it’s the turn of the Bank of England to set monetary policy – but we’re not expecting as many fireworks.
The Bank of England is widely expected to leave UK interest rates on hold today, at 5%, having cut them from 5.25% back in August.
The betting in the City is that just two policymakers will vote for a cut, and be outvoted by the other seven members of the Bank’s Monetary Policy Committee.
According to the money markets this morning, there’s an 80% chance of ‘No Change’ at noon today from the Bank, and just a 20% prospect of a cut in rates to 4.75%.
Yesterday, the MPC learned that UK inflation remained over their 2% target, running at 2.2% in August, while both core inflation and services inflation accelerated. That’s probably going to encourage some caution at Threadneedle Street, even though the economy has stagnated for the last two months.
Professor Andrew Angus at Cranfield School of Management explains:
“With economic growth and inflation having hit a plateau, I’m expecting the Bank of England to play it safe and hold interest rates.
“The economy had a good start to the year but businesses are now waiting for clarity on the government’s plans in next month’s all-important budget. This has cooled the economy and, combined with falling wage growth and unemployment levels, signals that a hold will be seen as the prudent choice for now. But, come November, the heat will be back on to cut rates.”
The Federal Reserve didn’t show much caution last night, though. It slashed US interest rates by half a percentage point, in its first interest rate cut since 2020, and a bigger cut than some investors expected.
It lowered its benchmark federal funds rate to between 4.75% and 5% – a significant turning point in its battle against inflation.
Chair Jerome Powell insisted the Fed was ‘recalibrating’ its policy to be more neutral, rather than panicking that the US was being dragged into recession by high interest rates.
He told reporters:
“I don’t see anything in the economy right now that suggests that the likelihood of a recession — sorry, of a downturn — is elevated.
You see growth at a solid rate, you see inflation coming down, and you see a labor market that’s still at very solid levels, so I don’t really see that.”
Powell casts the Fed’s 50-bps cut in non-scary terms: “We are committed to maintaining our economy’s strength.”
“This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained.”
— Nick Timiraos (@NickTimiraos) September 18, 2024
The Bank of England could also adjust the pace of its bond-buying programme, known as quantitative tightening (QT) – under which it is selling securities bought during its stimulus programmes.
Some economists reckon it will speed up the pace of its active bond sales, even though it crystallises losses sustained by the BoE, because more of its bonds will mature this year (meaning it would need fewer active bond sales to hits its sales target).
The agenda
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Noon BST: Bank of England sets interest rates
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1.30pm BST: US weekly jobless claims report
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2pm BST: South Africa’s central bank sets interest rates