Aurelia Butler

ORLANDO, Florida (Reuters) -The end of the Federal Reserve’s interest rate-cutting cycle is suddenly in sight, and a complete U-turn with rate hikes next year can no longer be ruled out.    The Fed lowered the fed funds rate by 25 basis points on Wednesday to a target range of 4.25%-4.50%, as expected. But if ever there was a “hawkish cut”, this was it.     The market reaction was swift and powerful: the dollar soared to a two-year high, stocks slumped, and Treasury yields surged. Markets can overshoot on days like these, but there was plenty here to back up the moves, whether investors were looking at the Fed’s statement, its revised projections or Chair Jerome Powell’s press conference.    First, the decision to cut wasn’t unanimous, as Cleveland Fed President Beth Hammack dissented. And Powell called the 25 bps cut a “closer call” than recent decisions. He also said that monetary policy is now “significantly less restrictive” and “significantly closer to neutral”.    Additionally, policymakers significantly raised their median 2025 inflation outlook to 2.5% from 2.1%, upped their view of the long run neutral rate of interest again to a six-year high of 3.0%, and halved the number of projected rate cuts next year to two.    While the Fed’s new projections are still pointing to 50 bps of easing next year and 100 bps by the end of 2026, the rates markets are having none of it. They’re now pricing in only 35 bps of cuts next year and that’s pretty much it. No more.    In short, the market is essentially calling the Fed’s bluff.     That’s largely because of the head-scratching logic behind the Fed’s 2025 outlook: policymakers expect inflation to be much higher than they had previously thought, yet they’re still planning to cut rates. It’s a difficult circle to square, as Powell discovered in his press conference.    The stance might be more defensible – and less jarring for markets – if growth and employment were also cratering. But they’re not. The Fed’s projections for both barely changed, with economic activity and the labor market expected to remain strong into 2026.NEVER RULE ANYTHING IN OR OUT    Only one year after Powell’s dovish pivot, markets may now be considering the possibility of a turn the other way.     Torsten Slok, chief economist at Apollo Global Management (NYSE:APO), was one of the first on the Street to float the idea that interest rates may actually rise next year. Wednesday’s developments have only reinforced his view that the economy is strong and thus rates will need to stay higher for longer.     “I believe there is now a 40% probability that the Fed will hike in 2025,” Slok said after the meeting.    It’s not an outlandish call, considering interest rate markets are anticipating that the Fed will begin an extended pause at its next meeting that will last well into 2025. The next quarter point rate cut is not fully priced in until September.    Of course, a lot can happen in nine months, especially given that President-elect Donald Trump is returning to the White House in January. If his proposed trade policies and tariffs are deployed, inflation could heat up, complicating the Fed’s job even more.    Economist Phil Suttle reckons this could force the Fed’s hand.     “My view remains that the next move from the Fed will be a hike in July, after a tariff-driven rise in inflation in the second quarter,” he wrote on Wednesday.    True, financial markets are not explicitly pricing in a U-turn from the Fed, and Powell on Wednesday dismissed the prospect as an unlikely outcome.     But the dollar is up 8% since the Fed’s first rate cut in September, and Treasury yields have risen 80 basis points. That suggests some segments of the financial universe are already anticipating tighter policy.     As Powell also said on Wednesday when asked about a possible rate hike next year: “You don’t rule things completely in or out in this world.”     Given how lousy the market has been at predicting Fed policy over the last few years, keeping an open mind is probably a very good idea.    (The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Michael Perry) More

Three of the BoE’s nine-person Monetary Policy Committee voted for a quarter-point rate cut instead, much higher than the one member economists polled by Reuters had expected.But BoE Governor Andrew Bailey said the central bank needed to stick to its existing “gradual approach” to cutting rates. MARKET REACTION:STOCKS: London’s FTSE-100 stock index cut its losses following the decision and was down around 1.1% by 1215 GMT. The domestically focussed FTSE-250 moved similarly.FOREX: Sterling dipped against the dollar and was last up 0.2% at $1.26080, from $1.2628 before the decision.BONDS AND MONEY MARKETS: Rates-sensitive two-year gilt yields were down less than a basis point at 4.46% while traders continued to expect two more BoE rate cuts next year.COMMENTS: CHRIS SCICLUNA, HEAD OF ECONOMIC RESEARCH, DAIWA CAPITAL MARKETS, LONDON:”There is a very decent case for a rate cut and the market pricing has become more hawkish. It looks like markets were too influenced by events in the U.S. economy and you can see that by what’s happened in U.S. and UK bond yields in the last three weeks.””The UK economy is behaving far more like the euro zone economy than the U.S. one. The UK economy is flatlining and that suggests the monetary policy stance is too tight.””There was a case for a rate cut today and there is a case for several cuts next year.” “I expect a cut in Feb when the BoE updates its projections.”NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, LONDON:”As expected, the Bank of England left the base rate unchanged. Clearly the spectre of inflation is its major concern rather than a stagnating economy.” “Ongoing poor news out of the all-important consumer sector is a concern, but that has been parked until the new year, when we will have heard from the major retailers on the Christmas period. It’s difficult to get enthused about the outlook for the economy at the moment and the path for interest rate cuts isn’t helping.” More

STOCKHOLM (Reuters) -Sweden’s central bank cut its key interest rate by quarter of a percentage point to 2.50% as expected on Thursday, but said that after easing policy five times this year, it saw reasons to be more cautious as it enters 2025.The Swedish economy has been treading water for the past two years after the Riksbank jacked up rates to fight surging inflation – which peaked at around 10% in late 2022.The central bank started cutting rates again in May and inflation is now below its 2% target. But while households and businesses remain wary about spending, inflation has edged up again in recent months.”If the outlook for inflation and economic activity remains unchanged, the policy rate may be cut once again during the first half of 2025,” the Riksbank said in a statement.”The interest rate has been reduced rapidly and monetary policy affects the economy with a lag. This argues for a more tentative approach when monetary policy is formulated going forward.”Governor Erik Thedeen said the outlook for rates was broadly the same as the central bank had indicated before it made a larger-than-usual half-percentage-point cut last month.”We are signalling the same cuts as we did in September and November, or if anything slightly more,” Thedeen told reporters.”We speeded up the cuts at the end of this year and now it’s reasonable to wait to see their effects.”The Swedish crown strengthened after the announcement.”We now expect just one more 25 basis point cut next year, in March, as we think the economy will start to pick up soon, dissuading policymakers from too much more policy loosening,” Adrian Prettejohn, Europe Economist at Capital Economics said.Analysts in a Reuters poll had been unanimous in seeing a quarter-point cut. They forecast two more cuts in the first half of next year with the policy rate stabilizing at 2.00%.Norway’s central bank kept its key rate on hold on Thursday.The Bank of England will announce its policy decision later in the day. More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning. On today’s agenda: US government faces shutdownA draw-it-yourself chart of the day And the FT’s Person of the YearGood morning. We start with the impact of the Federal Reserve’s decision yesterday to cut interest rates by a quarter of a percentage point. The reduction was in line with expectations, but the US central bank signalled a slower pace of easing next year and increased its 2025 inflation estimates, triggering big market movements.The dollar jumped to its highest level in two years against a basket of six currencies, while US stocks and government bond prices fell. The S&P 500 index closed down nearly 3 per cent and the tech-heavy Nasdaq Composite dropped 3.6 per cent. Shares in smaller-publicly listed companies, considered particularly sensitive to fluctuations in the US economy, were badly hit, with the Russell 2000 index closing down 4.4 per cent.Fed chair Jay Powell cited signs that progress on getting inflation down to the central bank’s 2 per cent target had stalled. He also acknowledged that some officials had begun to include assumptions about Donald Trump’s policies in their forecasts, a marked shift from his initial stance of avoiding speculation about what the next administration would do. Some economists fear that the president-elect’s plans for tariffs, mass deportations and tax cuts could lead to higher inflation, lower growth and more volatility, further complicating the Fed’s task of finding a “neutral” rate that neither slows nor accelerates growth. More interest rate decisions: The Bank of Japan left interest rates unchanged earlier today at 0.25 per cent as uncertainty swirled around Japanese wage growth and Donald Trump’s impending presidency. The Bank of England and Mexico’s central bank announce their latest interest rate decisions later. For the latest on the incoming Trump administration, sign up for our White House Watch newsletter. And here’s what else we’re keeping tabs on today:Economic data: The US has updated third-quarter GDP figures.Companies: Accenture, ConAgra, FedEx and Nike report results while members of the Teamsters union launch industrial action against Amazon in cities across the country.Luigi Mangione: The suspect in the murder of UnitedHealth Group executive Brian Thompson is due to appear in Pennsylvania for a hearing on whether he will be extradited to New York. War in Ukraine: Volodymyr Zelenskyy meets EU leaders in Brussels as the bloc’s chief diplomat warns western capitals to stop suggesting peace talks to the Ukrainian president. Vladimir Putin holds his annual press conference just days after one of his top generals was assassinated in Moscow.Five more top stories1. Joe Biden’s administration has unveiled tough new greenhouse gas emissions targets just weeks before Donald Trump’s inauguration. The upgraded targets are required by the UN in order for the US to meet its commitments under the 2015 Paris Agreement. Trump is widely expected to withdraw the US from international climate agreement when he returns to office next month. Here’s what the US government has committed to. More US politics news: Donald Trump yesterday attacked a bipartisan government funding deal as “foolish” and “inept”, killing the bill ahead of Friday’s deadline.2. A French court has found Dominique Pelicot guilty of repeatedly drugging and raping his wife over decades, and inviting more than 50 men to participate in the abuse in their family home. Judges sentenced the 72-year-old Pelicot, who had admitted to the crimes, to the maximum penalty of 20 years in prison. Read more on the conclusion to a case that has shocked people around the world.  3. Dealmakers are betting that a pick-up in so-called megamergers will gather pace under Donald Trump, after a rebound in larger deals helped push the value of takeovers back over the $3tn mark this year. The value of deals worth more than $5bn is up 19 per cent year to date. Here’s more on what dealmakers are saying about the outlook for next year. 4. EY has signed up its first new Dax-listed audit client since the collapse of payments group Wirecard despite a ban on winning auditing mandates from listed German companies. Qiagen, a biotech group listed in New York and Frankfurt, has hired the Big Four firm to be its new group auditor from January, highlighting the limitations of national audit regulation in Europe.5. The US has stepped up its battle against Isis in Syria as it seeks to prevent the group exploiting a power vacuum after rebels toppled the Assad regime. In the past two weeks, US forces have struck more than 75 Isis targets during two waves of attacks targeting jihadi leaders and camps in the fractured Arab state, Middle East Editor Andrew England reports. FT Person of the Year© Lyndon Hayes/FTThe Financial Times made Donald Trump its “Person of the Year” in 2016, a month before his inauguration as US president. He would end his first term helping to goad a mob assault on Capitol Hill, and much of the world agreed at the time that he had been, in the words of Joe Biden, “an aberrant moment”. Then came the most dramatic political comeback in modern US history. This year, the FT has again picked Trump because of his remarkable return to power. It is no longer possible to dismiss him as a blip.We’re also reading and watching . . . AI regulation: The outgoing head of the US Department of Homeland Security told the FT that Europe’s “adversarial” relationship with tech groups was hampering a global approach to regulation.US Supreme Court: Justices have agreed to hear TikTok’s appeal against a divest-or-ban law that will determine the video app’s fate in the US. The case will begin on January 10.Canada: A government once seen as embodying hopes for the renewal of liberalism in western democracies is now teetering on the brink of collapse. Justin Trudeau should go, argues the FT’s editorial board.DIY chart of the dayHow well do you know the jobs market? Test your knowledge on trends such as hybrid schedules, the gender pay gap and AI hiring with the FT’s new “draw your own chart” game.Some content could not load. Check your internet connection or browser settings.Take a break from the newsThis year the FT’s Financial Literacy and Inclusion Campaign (Flic) has teamed up with the charity Magic Breakfast to create Feed the Future, a campaign designed to make sure every schoolchild starts the day with a nutritious meal as well as financial skills training. Donate here. Breakfast clubs foster a sense of belonging that is crucial for attendance and attainment More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The yen weakened past ¥157 against the dollar on Thursday after Bank of Japan governor Kazuo Ueda said the central bank needed “one more notch” of information before committing to its next interest rate rise, as uncertainty swirled around Japanese wage growth and Donald Trump’s impending presidency.Ueda’s comments at a press conference followed the BoJ’s announcement that it was holding short-term interest rates at 0.25 per cent.That decision had been widely forecast, but many economists had expected a firm indication of a rate rise at the BoJ’s next meeting in January. The absence of such a signal sent the yen tumbling against the US dollar, from about ¥155 at the start of his press conference to more than ¥156.6 by the time it ended. The Japanese currency later fell past ¥157.1, its lowest level since July.Ueda said the central bank was seeking greater clarity on Japanese wage growth as well as how Trump’s fiscal, trade and immigration policies would affect global financial markets. But such insights would take some time to emerge, he said.“Needless to say, [on] both Japan’s wage outlook and the impact of Trump’s policies, [it will] take a long time to grasp the entire picture,” said Ueda, noting that Japan’s underlying inflation was also “very moderate”.The BoJ final monetary policy meeting of 2024 was further complicated by the US Federal Reserve’s move on Wednesday to cut rates by a quarter of a percentage point while signalling a slower pace of rate cuts next year.The Japanese central bank policy board’s decision was not unanimous, with Naoki Tamura, a former executive at Sumitomo Mitsui bank, calling for interest rates to rise to 0.5 per cent, arguing that “risks to prices had become more skewed to the upside”.The two-day meeting also included an extensive review of Japan’s monetary policy history over the 25 years since the economy fell into deflation. The BoJ ended its eight-year experiment with negative interest rates in March before raising rates to 0.25 per cent in July, a move that roiled currency and equity markets.The 212-page analysis concluded that the most intensive period of monetary easing — when the central bank under former BoJ governor Haruhiko Kuroda targeted 2 per cent inflation and undertook a series of unconventional policy experiments — “did not have as large an upward effect on prices as originally expected”.The review found that large-scale monetary easing also had the side-effect of damaging the functioning of the Japanese government bond market. “Attention should be paid to the possibility that the negative effects could become larger in the future,” the report concluded, warning of “the possibility that the functioning of the JGB market does not fully recover”.On Thursday, Ueda said that the BoJ would not rule out unconventional monetary policies in the future.Economists had initially expected a rate rise going into the December meeting, though by this week a majority anticipated the BoJ would wait until January. But some warned that the decision to put off further rises until 2025 risked signalling to markets that Ueda’s push to “normalise” monetary policy was losing momentum.“In kicking the can further down the road, the risk is that the market begins to doubt the BoJ’s broader commitment to policy normalisation,” said Benjamin Shatil, senior Japan economist at JPMorgan.Stefan Angrick, head of Japan economics at Moody’s Analytics, said the latest run of economic data had left the BoJ with limited options. “The domestic economy isn’t strong enough for significant rate hikes, but maintaining the status quo risks further yen depreciation and higher inflation,” said Angrick. He warned that ambiguous communication would tie the monetary policy outlook to foreign exchange market fluctuations. More