Evelyn Reynolds

The ruling Labour government has faced criticism for generating an atmosphere of doom over the state of the public finances.
Prime Minister Keir Starmer has warned of “painful” decisions after the party rallied to victory in the July general election.

Britain’s Chancellor of the Exchequer Rachel Reeves speaks on the second day of the annual Labour Party conference in Liverpool, north-west England, on September 23, 2024. 
Paul Ellis | Afp | Getty Images

Liverpool, ENGLAND — U.K. Finance Minister Rachel Reeves vowed on Monday that Britain will not return to austerity, but said she would make hard choices as she lays out budget proposals next month.
“It will be a budget with real ambition … a budget to deliver the change we promised. A budget to rebuild Britain,” she told a crowd of Labour party delegates Monday. “There will be no return to austerity.”

Her keynote speech, briefly interrupted by heckles from a pro-Palestinian protester in the crowd, came as Labour kicked off its annual party conference on Monday — its first in power for 15 years.
The ruling Labour government has faced criticism for generating an atmosphere of doom over the state of the public finances, with Prime Minister Keir Starmer warning of “painful” decisions after the party rallied to victory in the July general election.
Reeves has suggested that taxes are likely to rise at her upcoming Oct. 30 Autumn budget after discovering a £22 billion ($29 billion) “black hole” in the public finances. Her predecessor Jeremy Hunt, from the rival Conservative Party, has denied the claims as “fictitious.”
“I know that you are impatient for change. But because of that legacy inherited by the Conservatives, the road ahead is steeper and harder than we expected,” she told the audience Monday.

Reeves defended a divisive move earlier this month to cut winter fuel allowances for millions of pensioners as the “right decision in the circumstances we inherited.”

However, she reiterated that the government would not raise income tax, the National Insurance social security payments, value-added tax (a sales levy) and corporation tax
Instead, she vowed to raise additional revenues by eradicating the U.K.’s non-dom tax concession and clamping down on forms of tax avoidance and tax evasion.
“This government will not sit back and indulge those who do not pay the taxes they owe,” she said.
Reeves also restated the government’s position as “proudly pro-business,” referencing plans next month to host a business summit and announce proposals for a new national industrial strategy. That, she said, would include measures for Britain to reach its net zero and clean energy goals by 2030.
Additionally, she said that the government would continue to pursue trade deals to “open up new markets,” as negotiations currently remain underway with major partners such as India.

“After years of instability and uncertainty, Britain is open for business once again,” she said.
Half of Britons, including a quarter of Labour voters (26%), are disappointed with the government’s achievements so far, Ipsos opinion polling showed Friday. Gideon Skinner, Ipsos’ senior director of U.K. politics, said the findings were an indication that the government’s “honeymoon period” was over.
“There’s a seeping back of pessimism and concern following a few months of hope after the election,” Skinner said earlier Monday at the Labour party conference. More

Fed Chair Jerome Powell has unveiled his latest buzzword to describe monetary policy, with a “recalibration” of policy at a pivotal moment for the central bank.
Asset prices soared Thursday as investors took Powell at his word that the unusually outsized move wasn’t in response to a substantial weakening of the economy but rather an effort to shore up the labor market.
“It really allows him to push this narrative that this easing cycle is not about us being in recession, it is about extending the economic expansion,” PGIM economist Tom Porcelli said. “I think it’s a really powerful idea.”

Federal Reserve Chair Jerome Powell has unveiled his latest buzzword to describe monetary policy, with a “recalibration” of policy at a pivotal moment for the central bank.
At his news conference following Wednesday’s open market committee meeting, Powell used variations of the word no fewer than eight times as he sought to explain why the Fed took the unusual step of a half percentage point rate cut absent an obvious economic weakening.

“This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we begin the process of moving forward a more neutral stance,” Powell said.
Financial markets weren’t quite sure what to make of the chair’s messaging in the meeting’s immediate aftermath.
However, asset prices soared Thursday as investors took Powell at his word that the unusually outsized move wasn’t in response to a substantial slowing of the economy. Rather, it was an opportunity to “recalibrate” Fed policy away from a rigid focus on inflation to a broader effort to make sure a recent weakening of the labor market didn’t get out of hand.
The Dow Jones Industrial Average and S&P 500 jumped to new highs in trading Thursday after swinging violently Wednesday.
“Policy had been calibrated for meaningfully higher inflation. With the inflation rate now drifting close to target, the Fed can remove some of that aggressive tightening that they put into place,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income.

“It really allows him to push this narrative that this easing cycle is not about us being in recession, it is about extending the economic expansion,” he added. “I think it’s a really powerful idea. It’s something we had been hoping that he would do.”

Powell’s buzzwords

Several of Powell’s previous efforts to provide buzzy descriptions of Fed policy or its views on the economy haven’t worked out so well.
In 2018, his characterizations of the efforts to reduce its bond holdings as being on “autopilot,” as well as his assessment that a string of rate hikes the same year had brought the Fed “a long way” from a neutral interest rate spurred blowback from markets.
More famously, his insistence that an inflation surge in 2021 would prove “transitory” ended up causing the Fed to be slow-footed on policy to the point where it had to enact a series of three-quarter percentage point rate increases to pull down inflation.
But markets expressed confidence in Powell’s latest assessment, despite this track record and some signs of cracks in the economy.

“In other contexts, a larger move may convey greater concern about growth, but Powell repeatedly stressed this was basically a joyous cut as ebbing inflation allows the Fed to act to preserve a strong labor market,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a client note. “Moreover, if policy is set optimally, it should return the economy to a favorable place over time.”
Still Feroli expects the Fed will have to follow up Wednesday’s action with a similar-sized move at the Nov. 6-7 meeting unless the labor market reverses a slowing pattern that began in April.
There was some good news on the jobs front Thursday, as the Labor Department reported that weekly claims for unemployment benefits slid to 219,000, the lowest since May.

An unusual move lower

The half percentage point — or 50 basis point — cut was remarkable in that it’s the first time the Fed has gone beyond its traditional quarter-point moves absent a looming recession or crisis.
Though Powell did not give credence to the notion that the move was a makeup call for not cutting at the July meeting, speculation on Wall Street was that the central bank indeed was playing catch-up to some degree.
“This is a matter of maybe he felt like they were getting a little bit behind,” said Dan North, senior economist for North America at Allianz Trade. “A 50 basis point cut is pretty unusual. It’s been a long time, and I think it was maybe the last labor market report that gave him pause.”
Indeed, Powell has made no secret of his concerns about the labor market, and stated Wednesday that getting in front of a potential weakening was an important motivator behind the recalibration.
“The Fed still sees the economy as healthy and the labor market as solid, but Powell noted that it is time to recalibrate policy,” wrote Seth Carpenter, chief global economist at Morgan Stanley. “Powell has stressed and proven with this rate cut that the FOMC is willing to move gradually or make bigger moves depending on the incoming data and evolution of risks.”

Carpenter is among the group that expects the Fed now can dial down its accommodation back to quarter-point increments through the rest of this year and into the first half of 2025.
Futures markets traders, though, are pricing in a more aggressive pace that would entail a quarter-point cut in November but back to a half-point move in December, according to the CME Group’s FedWatch gauge.
Bank of America economist Aditya Bhave noted a change in the Fed’s post-meeting statement that included a reference to seeking “maximum employment,” a mention he took to indicate that the central bank is ready to stay aggressive if the jobs picture continues to deteriorate.
That also means the recalibration could get tricky.
“We think the Fed will end up front-loading rate cuts more than it has indicated,” Bhave said in a note. “The labor market is likely to remain tepid, and we think markets will push to do another super-sized cut in 4Q.”

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The Bank of England’s Monetary Policy Committee voted by 8 to 1 to hold, with the dissenting member voting for a 0.25 percentage point cut.
Kyle Chapman, foreign exchange analyst at Ballinger Group, said the BOE delivered a “more decisive and more hawkish vote than expected” with the 8 to 1 vote split, supporting gilt yields and lifting sterling.
The central bank also voted to reduce its stock of bonds by £100 billion ($133 billion) over the next twelve months through active sales and the maturation of bonds.

Commuters cycles past the Bank of England (BOE), left, in the City of London, UK, on Monday, Sept. 16, 2024. The central bank’s Monetary Policy Committee’s interest rate decision is scheduled for release on Sept. 19. 
Bloomberg | Bloomberg | Getty Images

LONDON — The Bank of England on Thursday said it would hold interest rates steady following its initial cut in August, even after the U.S. Federal Reserve opted for a jumbo rate cut the day before.
The Monetary Policy Committee voted by 8 to 1 to hold, with the dissenting member voting for another 0.25 percentage point cut.

A “gradual approach” to monetary easing remained appropriate, with services inflation remaining “elevated,” the committee said. The U.K. economy, which has returned to growth but been sluggish this year, is expected to return to an underlying pace of around 0.3% per quarter in the second half, it added.
The MPC was assessing a mixed bag of data in making its rate decision, with headline inflation consistently coming in near to its 2% target but price rises in services — accounting for around 80% of the U.K. economy — ticking higher to 5.6% in August. Wage growth in the U.K. cooled to a more than two-year low over the three months to July, but remained relatively high at 5.1%.
The British pound was bolstered by the BOE and Fed announcements, trading up 0.72% against the U.S. dollar at $1.3306 at 12:10 p.m. London time Thursday. That was the highest rate since March 2022, according to LSEG data.
Global equity markets meanwhile rallied Thursday, with the pan-European Stoxx 600 index 1.45% higher.

Also being monitored Thursday was the BOE’s annual announcement on the pace of quantitative tightening (QT). The central bank voted to reduce its stock of bonds – known as gilts – by £100 billion ($133 billion) over the next twelve months through active sales and the maturation of bonds.

That amount was in-line with the prior period, against the expectation of some for an acceleration of the program. The BOE’s balance sheet swelled during the pandemic as it sought to boost the economy, before it reversed course and began QT in February 2022.
The BOE sustains losses on its QT program, subsidized by the taxpayer, because bonds are being sold for lower prices than they were bought for. However, BOE Governor Andrew Bailey argues the central bank needs to conduct QT now to have space to undertake more quantitative easing or other operations in the future.

Fed influence

The BOE confirmed expectations for a hold even after the U.S. Federal Reserve on Wednesday kicked off its own rate cuts in the current cycle with a 50 basis point reduction. Many strategists had expected a smaller 25 basis point cut at the September meeting, despite market pricing through this week pointing to more than 50% probability of the more aggressive option.
Fed Chair Jerome Powell told a news conference the central bank was “trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation.” Recent U.S. labor market data had sparked concerns about the extent of the slowdown in the world’s largest economy.
The MPC’s decision was likely locked-in around midday Wednesday, ahead of the Fed’s announcement, but central bankers around the world will now be assessing what the move means for global economic growth and financial conditions.
Kyle Chapman, foreign exchange analyst at Ballinger Group, said the BOE delivered a “more decisive and more hawkish vote than expected” with the 8 to 1 vote split, supporting gilt yields and lifting sterling.
“This is a cautious decision which reflects the fact that the Bank of England is simply not in as fortunate a position as the Federal Reserve with regards to inflation… That said, this meeting reads rather like a lead up to a cut in November, and a continued quarterly pace thereafter.”
The Bank of England cut its key rate to 5% from 5.25% in August in a tight 5 to 4 vote, and was widely expected to hold them there until its next meeting in November.
Deutsche Bank Chief U.K. Economist Sanjay Raja reiterated a call for one more rate cut this year, taking the Bank Rate to 4.75%, followed by four quarter point rate cuts through 2025. “We see risks skewed to a faster dial down of restrictive policy in the near-term,” Raja added.

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Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said regarding the QT program that the Bank of England was “stuck between a rock and a hard place and that’s because of the choice they made in the past,” and that it was the only central bank in the world that was recording these types of losses.
The U.K.’s new Labour government is due to deliver its first budget in October. Extending passive and active QT into next year will create “problems for fiscal policy, at least it doesn’t make the government’s job easier,” Ducrozet told CNBC’s “Street Signs Europe” shortly ahead of the decision.
“Or you don’t, and then you look like you’re not really independent from the government, you make more losses and you have to manage that over time,” he said. Keeping the rate of QT unchanged, as thne BOE opted to do, provided somewhat of a “middle ground,” he added. More