FED – Easing cycle has started
Last week, the Fed lowered its overnight rate to 4.00–4.25%. Rates rallied on the decision but retraced during Powell’s speech. The focus is now on labour market deterioration and rising unemployment. The Dot Plot indicated that two more cuts are expected from FOMC members, broadly in line with market expectations. It also revealed significant internal divisions beyond Miran’s dissent. We believe the Fed will continue cutting rates this year, as real rates remain elevated in the U.S. Looking ahead, we expect other central banks to become more comfortable easing policy as U.S. policy moves closer to normalisation.
BoE and BoJ – On hold, with different trajectories
Last week, both the BoE and BoJ kept rates unchanged, as widely expected. The BoJ, in particular, is maintaining a wait-and-see approach, but the October meeting will be crucial as the market is already pricing in a hike with more than 50% probability. We believe normalization will be challenging and that the hiking cycle will be complicated. In the UK, the BoE has set a higher threshold for future cuts. The QT update did not provide any catalyst for constructive duration. Overall, we see a foggy outlook for the UK, where public finances and fiscal dynamics are likely to dominate the yield narrative.
Algebris Investments’ Global Credit Team
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