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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Federal Reserve officials have indicated they still expect to cut interest rates by three-quarters of a percentage point this year, sending US equity markets to record highs. The market reaction on Wednesday came after the Federal Open Market Committee voted unanimously to leave rates unchanged at a 23-year high of 5.25 per cent to 5.5 per cent.The central bank also sharply raised its forecast for US economic growth this year, while saying inflation would be slightly higher than expected.The latest statement leaves the Fed on course to begin cutting rates as early as the summer, calling time on a mission to quell inflation that jumped as the US economy emerged from the Covid-19 pandemic.It also means borrowing costs and mortgage rates that soared in recent months could begin falling just ahead of the presidential election in November.“The economy is performing well,” said Fed chair Jay Powell in the news conference after the FOMC announcement. US gross domestic product would expand by 2.1 per cent this year, officials predicted, compared with their previous forecast of 1.4 per cent.But with projections for core inflation of 2.6 per cent this year, slightly higher than expected, Powell signalled the path to a soft landing may yet be complicated. Inflation was still on a “sometimes a bumpy road towards 2 per cent”, he said, referring to the Fed’s official target. “That’s why we are approaching this question carefully.”The concerns about inflation were reflected in the Fed’s so-called dot plot. Although it showed officials believe rates would end 2024 at 4.5 per cent to 4.75 per cent — equivalent to three quarter-point cuts — far fewer expected the central bank to risk even deeper cuts.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The Fed’s policy statement was little changed from its vote in January, though a reference to a slowdown in the labour market was removed. “Job gains have remained strong, and the unemployment rate has remained low,” the FOMC said.The market moves came after the Fed kept three quarter-point cuts on the table for 2024, scotching warnings from some economists that recent signs of higher inflation could spark a shift towards just two cuts. The blue-chip S&P 500 closed up 0.9 per cent, at a new record, continuing a rally that has pushed the index 27 per cent higher since October. The Nasdaq Composite gained 1.3 per cent.The two-year Treasury yield, which moves with interest rate expectations, fell 0.09 percentage points to a one-week low of 4.60 per cent.“Today’s dot plot shows that even though the Fed is expecting faster near-term growth and slightly hotter inflation, there is no change to rate cuts,” said Gargi Chaudhuri, head of iShares investment strategy, Americas at BlackRock. “They still think they need to gradually ease rates back. I think that’s a really great outcome for markets — for equity markets and for bond markets. It’s a really good outcome for investors.”As Powell spoke, investors in the futures market added to bets on a rate cut in June, putting the odds at about 85 per cent, versus 65 per cent on Tuesday.Eswar Prasad, professor of economics at Cornell University, said: “The Fed’s conservative approach is being vindicated by incoming data and by financial market participants dutifully falling in line with the Fed’s projected path of interest rates.”Prasad added: “With no compelling reason to cut interest rates and with the persistence of inflation above target leaving it little room to cut, the Fed’s passivity on interest rates seems entirely justified.” Alongside its more bullish outlook for economic growth, the Fed said it expected headline and core consumer price expenditures inflation to hit 2.4 per cent and 2.6 per cent this year, respectively, while unemployment would edge up to 4 per cent from 3.9 per cent. In December, the FOMC forecast headline and core CPE inflation of 2.4 per cent for 2024, and expected unemployment to rise to 4.1 per cent.Powell suggested it was too soon to know whether recent signs of stickier than expected inflation, especially in the services sector, would last.“We’re going to let the data show. We don’t know if this is a bump in the road or something more,” the Fed chair said, adding that he did not think recent readings had “really changed the overall story” of price pressures easing to 2 per cent.The Fed also said it would maintain for now the pace at which it is reducing its bond and mortgage-backed security holdings, a process known as quantitative tightening.But Powell said the sense of the committee “is that it will be appropriate to slow the pace of run-off fairly soon”, though he added that “does not mean that our balance sheet will ultimately have shrunk by less than what it would otherwise”.Matthew Raskin, US head of rates research at Deutsche Bank, said he thought the meeting had set an overall “dovish” tone, as the higher growth and inflation projections contrasted with officials’ expectations to cut as planned. “The striking thing about the statement is how little change there was. It might be as little change in a statement as we’ve seen in a while,” he said.Additional reporting by Peter Wells in New York More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.For market watchers, the prospect of Japan’s interest rates rising into positive territory became more unnerving with each passing year. The longer borrowing costs remained below zero, the more traders and investors — at home and abroad — became accustomed to it. A reversal of that status quo risked upsetting financial stability. But on Tuesday, after eight years in the negative, the Bank of Japan governor Kazuo Ueda pulled it off in smooth style. He raised rates from -0.1 per cent, to a range of 0 to 0.1 per cent, and called time on yield curve control. Global markets took it all in their stride. That is down to the BoJ’s prudent choreography. It gradually loosened its approach to YCC in prior meetings to avoid abrupt market moves. Its decision was well signalled, allowing traders time to price it in. The central bank also decided to continue buying Japanese government bonds and made clear that rates would not march higher any time soon.Outright tightening still seems far off. Most analysts do not expect recent wage growth to be maintained, and near-term inflationary momentum has waned. The BoJ nonetheless needs to continue to tread carefully. Markets will want to decipher the central bank’s plan for normalisation, so its next steps take on even greater importance. Financial exposures, forged during the BoJ’s ultra-loose era, have not gone away. First, in the hunt for better than near-zero returns at home, Japanese institutions, including pension funds, life insurance companies and banks, have become major international investors. International portfolio investments were over $4tn at the end of 2023. Japan is the largest foreign holder of US government debt. Higher yields back home could tempt Japanese investors to retrench, reducing demand for US and European government debt in the process. Higher hedging costs have already prompted some to do so. The yen has also been the funding currency for carry trades, where investors borrow in low-cost yen and swap it for higher-yielding dollars. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.The second source of risk comes from Japan’s public finances. At around 2.5 times the size of its economy, Japan’s debt is vulnerable to any uptick in yields and reduced bond-buying by the BoJ. Institutional investors with significant asset holdings in Japanese bonds could face losses if domestic rates move higher. For commercial banks, higher rates will boost net interest margins, but regulators are alive to the risk of Silicon Valley Bank-style dynamics from any losses on assets. Indeed, few bankers have experience of a rising rate environment. Borrowers accustomed to low rates could also face difficulty.Third, in their search for yield some Japanese banks have engaged in riskier lending abroad. For instance, shares in Tokyo-based Aozora Bank recently slumped after it flagged losses tied to its US commercial property book. These exposures could have a knock-on effect at home. For now, any major repatriation of investments or unwinding of the carry trade is unlikely. US bond yields are still significantly more attractive. A sharp and rapid step-up in the BoJ’s policy rate, which could also drive a significant appreciation in the yen, is off the table too. In any case, the central bank appears willing to intervene to support financial stability. But vigilance is important. Even if Japan’s policy rates do not move unpredictably, America’s might. That will affect spreads, exchange rates, and hedging costs. Other economic shocks could alter Japan’s domestic growth, inflation and public finance outlook.The BoJ made a significant step on Tuesday. But the journey to normalising Japan’s monetary policy remains a long slog. Financial threats lurking after years of sub-zero rates have so far been tamed — in no small part down to the central bank’s clear and careful approach. That must now continue. More