Market Update

Global markets were abuzz this week with a series of central bank decisions, with the US Federal Reserve taking center stage on Wednesday by cutting the Federal Funds Rate by 50 basis points to 4.75-5.0%. This marked the first easing of monetary policy since March 2020. While many had expected a smaller 25 basis point reduction, the decision to cut by 50 basis points reflected growing confidence that inflation is under control and that the labour market can remain strong.
Federal Reserve Chair Jerome Powell explained that the move was aimed at supporting the economy and maintaining a strong labour market as inflation continues to ease. He remarked, “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 labour market can be maintained… You can take this as a sign of our commitment not to get behind.”
This rate cut is a positive development, as it lowers borrowing costs for consumers—reducing the cost of mortgages, car loans, and credit cards. It also encourages businesses to invest in expansion and hiring. The challenge for policymakers, however, will be balancing the cooling labour market with the need to maintain inflation near the 2% target.
The key question now is how far and how quickly the Fed will continue its easing cycle. Powell emphasized that they are not following a preset course and will make decisions based on data, meeting by meeting.
Initially, the stock market reacted positively to the news, but stocks reversed gains by the close as investors weighed the broader implications of the rate cut. However, by Thursday, markets had rallied, viewing the 0.5% cut as a sign that the Fed has confidence inflation is under control and that the economy may be on track for a "soft landing"—a scenario where inflation eases without triggering a recession. The Fed’s updated “dot plot” projections also caught attention, suggesting a lower trajectory for rates in the coming year. Policymakers now expect the federal funds rate to fall to 3.4% by the end of 2025, a revision from earlier forecasts.
Meanwhile, on Thursday, the Bank of England’s Monetary Policy Committee (MPC) held interest rates steady at 5% following a 25-basis-point cut last month. Governor Andrew Bailey explained that, barring any unexpected inflationary surprises, the Bank should be able to reduce rates gradually over time. However, he stressed the importance of maintaining low inflation, warning that the Bank must be cautious about cutting rates too quickly or by too much.
Inflation in the UK appeared to stabilize, with August’s inflation holding steady at 2.2%, higher than the Bank of England’s 2% target but lower than the 2.4% the Bank had predicted at this stage. It is possible that further rate cuts could be on the horizon, providing relief to borrowers and benefiting financial markets.
Economic data for the UK was mixed. While consumer confidence dropped in September, retail sales showed a solid gain, rising by 1% in August—its highest level in more than two years—beating expectations of a 0.4% increase. However, the sharp drop in consumer confidence, coupled with households’ concerns about the upcoming autumn Budget, added uncertainty to the economic outlook. We will provide further updates leading up to the Budget and a market summary after its announcement on 30th October.
Public finances faced pressure in August, with public sector borrowing reaching £13.7 billion, surpassing forecasts and raising net debt to 100% of GDP. This was the highest August borrowing figure on record, excluding pandemic years. While tax receipts showed some improvement, rising costs for public services and benefits, driven by inflation, continued to strain government spending.
Finally, central banks in Japan and China also made decisions on Friday, keeping their interest rates unchanged.