What rates your interest this week

              At first glance, next week, you would think the Fed is likely to cut interest rates this Wednesday; and at one point earlier in the year, that was the expectation. However, there are significant odds against such a move now. Certainly, with inflation as measured by the Personal Consumption Index being within 0.1% of the Federal Reserve’s 2% target, the labour market softening, economic activity slowing, and recent rises in consumer inflation expectations now beginning to decline, surely is the perfect time to cut rates. Despite this, Powell has continually repeated that the policy is in a “good place”. I’m not sure Donald agrees, but everyone is entitled to their opinion, I suppose.

The problem is possibly of Donald’s own making, as the Fed are waiting to see the outcome of the “beautiful bill”, which has the potential to stoke inflation once again, along with the tariff increases whose effects are yet to be felt. What we get on Wednesday is a better steer on the Fed’s current thinking about when and if, under what circumstances, they will be minded or not to cut rates. The issue is that, at present, although the US economy is slowing, not many are forecasting a recession. So the question is, if they did cut, would that suggest they are more concerned about growth going forward or more comfortable with inflation being under control?

The Fed is not the only central bank meeting next week; the Bank of England convenes on Thursday and the Bank of Japan on Monday. The BoJ are not expected to raise interest rates, as the economic backdrop remains unclear. Analysts are also watching for any updates on the BOJ’s outlook for economic activity and inflation targets. The Bank of England are likely, despite clear indications of a weakening labour market and softening PMIs, to keep rates as they are, having cut last month by 25 basis points. The monthly inflation data comes out on Tuesday ahead of the meeting on Thursday, but whilst headline inflation remains well above the Bank’s target, they will most likely hold fire for another day.

The spike in the oil price, as political tensions increase in the Middle East, will further muddy the outlook for interest rates. A spike in the oil price is a tax, as we pointed out on Friday, but it also pushes up costs and prices. One has only to go back in history to see that. In 1979, oil prices nearly doubled, leading to global inflation and recessions in the U.S., Europe, and Japan. In 1990, Iraq’s invasion of Kuwait led to a sharp rise in oil prices, which again contributed to a global recession, with U.S. GDP growth slowing and inflation rising. For those a bit younger, Oil prices peaked at around $147, and one could argue that it was a catalyst for the global financial crisis, as rates rose to tame inflation. With oil prices remaining stable over the weekend equity markets are opening largely unchanged from Friday’s close.