Economy

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

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This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersThe possibility of a conflict between the incoming Donald Trump administration’s policies and the Federal Reserve’s price stability mandate has been a topic of discussion since before the election. We have long known — in broad, blurry outline — what the new president’s policy aspirations are. Lower taxes, lower immigration, higher tariffs, a smaller current account deficit. Yesterday came the first intimations — again, broad and blurry — of what the central bank response to all of that might be.The open market committee cut its policy rate by a quarter point, as expected. But the rub was not in their action, but in their expectations. The Summary of Economic Projections, last seen back in pre-election September, showed a 50 basis point increase in the anticipated policy rate for the end of next year. It now stands at 3.9 per cent, a bit more than two rate cuts from where we stand today. The expectation for 2025 inflation rose 40 basis points, to 2.5 per cent. More significantly, perhaps, the committee’s uncertainty about inflation increased dramatically. The range of members’ 2025 inflation projections, from lowest to highest, was 30 basis points in September. Now it’s 80.The natural question, faced with this change, is how much the election altered the committee’s outlook. Several journalists asked away, focusing on the inflationary impact of tariffs. Powell’s answer, somewhat disconcertingly, had two distinct aspects. First he said this:This is not a question that’s in front of us right now. We don’t know when we will face that question. What the committee is doing right now is discussing pathways and understanding the ways in which tariffs can drive inflation in the economy . . . that puts us in [a] position, when we do see what the actual policies are, to make a more careful, thoughtful assessment of what might be the right policy responseThis sounds sensible. Then he said this:Some people [on the committee] did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policy into their forecasts at this meeting and said so in the meeting. Some people said that they didn’t do so, and some people didn’t say whether they did or not …Some did identify policy uncertainty [as a reason] for writing down more uncertainty about inflation. And the point about uncertainty is its kind of common sense thinking that when the path is more uncertain you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture.In the letter, the two statements are consistent. Together they say that while possible Trump policies did not enter into the rate decision, they did enter into the SEP. In spirit, though, they are inconsistent, because in central banking, expectations are policy. This was visible in the market reaction yesterday. Faced with a Fed that is worried about Trumpy inflation, and thinking more hawkishly as a result, the S&P 500 fell 3 per cent, two-year bonds rose 14 basis points, and 10-year bonds rose 10 basis points. Small-cap stocks, darlings of the Trump Trade, fell hard and have now given up all their post-election gains:Have the Fed members made a mistake, thinking they know what Trump’s policies will be, and how they will impact the rate trajectory? And in so doing, did they show some political bias? On both fronts, I’d say they probably have. Everyone seems to think they know what the second Trump administration will do. But the president’s mercurial leadership style, his heterogenous cabinet picks, and his party’s narrow margins of control in both houses of Congress mean confidence on this topic is foolish. Arguments that tariff and immigration policy must cause persistent inflation are a bit wobbly, compound the overconfidence problem, and smell of motivated reasoning.Before condemning Powell and his colleagues, however, remember three things.One: the committee also had good non-political reasons to increase their inflation expectations. The last two consumer price index inflation readings have been discouraging, and growth has continued to come in hotter than expected. Indeed, plenty of pundits have argued even today’s cut was a mistake (imagine the market reaction if the committee had stood pat!). Some rewriting of the 2025 expectations was already in order; don’t overstate the political aspect.Second: no plan survives contact with the enemy. We are still in the realm of expectations. The real battle between Trump fiscal policy and Fed monetary policy has not been joined, and when it is, the picture will change. It need not be bloody. Chair Paul Volcker and president Ronald Reagan had a lively tug of war in the 1980s, and the country was just fine.Finally: do not overread the market’s reaction. Stock valuations are historically high and the bull market has been running for a long time. Expectations that the Fed will cut rates next year are entrenched. In this environment, it will not take much of an increase in rates expectations to whipsaw the stock market. That is something Trump and Powell will both have to keep in mind.Cars and 2025 We promised our 2025 predictions would come today, but in the face of yesterday’s consequential Federal Reserve meeting, they will have to wait. We did get a lot of responses on people’s favourite cars, though. They showed Unhedged readers are a sundry bunch. One reader emailed simply “Ferrari 286 GTB”; another talked lovingly of a 2008 Toyota Rav4. Some kept it current with electric cars from Tesla and BMW; others went old school with the Volkswagen T4 camper van or the now-extinct Lancia Kappa. The automobile industry is struggling, but people sure do love their cars. Email us with the worst one you’ve ever owned: robert.armstrong@ft.com and aiden.reiter@ft.com.One good watchFrom Frankfurt, with love.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youDue Diligence — Top stories from the world of corporate finance. Sign up hereFree Lunch — Your guide to the global economic policy debate. Sign up here More

Donald Trump is still weeks away from taking the oath of office, but the president-elect’s vow to enact a sweeping policy overhaul is already looming large over the Federal Reserve.The US central bank trimmed interest rates by a quarter of a percentage point on Wednesday in its third consecutive reduction, but officials’ projections for half as many rate cuts next year as they had forecast in September triggered big market swings.Fed chair Jay Powell said that while the more cautious outlook for rate cuts was prompted by signs that progress on getting inflation down to the central bank’s 2 per cent target had stalled, some officials had also begun to include assumptions about Trump’s policies in their forecasts.“Pretty much every prong of [Trump’s] policy looks like it’s going to threaten their mandate,” said Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives, referring to the central bank’s aims to keep inflation low and stable and maintain a healthy labour market.Coronado added that the Fed’s message was clear: “We are not in Trump 1.0 any more. This is Trump 2.0, we have above-target inflation and we need to get ahead of this.”Trump’s threats to impose tariffs, carry out mass deportations and slash taxes and regulations could have wide-ranging economic implications, said investors and analysts. Some economists are concerned that the overhaul will lead to higher inflation, lower growth and more volatility.Economists acknowledged the groundwork for a shift to a more gradual pace of rate cuts next year was already taking shape before Trump’s election win in early November. Inflation readings in September and October came in higher than anticipated, supplanting fears about the labour market’s health that had bubbled over the summer.The Fed’s preferred inflation measure, the core personal consumption expenditures price index, rose at an annual rate of 2.8 per cent in October and is forecast to have accelerated to 2.9 per cent in November, according to a FactSet survey of economists.Powell noted these shifts on Wednesday and also made clear that after December’s cut, the Fed had entered a “new phase” in which it needed to be much more “cautious” about its actions given interest rates were now closer to officials’ best estimates of a “neutral” level that neither slows nor accelerates growth.While the Fed’s policy settings were still “meaningfully restrictive”, Powell made clear that more cuts would depend on further progress on inflation.But Powell also signalled a marked shift in the way the Fed was considering the changes that Trump has vowed to enact, diverging from his stance in the aftermath of November’s election that the Fed would not “speculate” or “assume” anything about what the next administration would do.This was most visible in the revised set of officials’ economic projections published by the central bank alongside the rate decision. Rather than a full percentage point worth of reductions for next year, which was forecast in September, most officials projected only half a point. They also scaled back their estimates for 2026 and 2027.Officials also sharply raised their median forecasts for inflation. The “central tendency” for the core PCE price index — which excludes the three highest and three lowest estimates — jumped to a range of 2.5-2.7 per cent. That is up from 2.1-2.3 per cent in September.The scale of adjustments cascaded through financial markets on Wednesday, sending the S&P 500 index down nearly 3 per cent, pushing the dollar to a two-year high and elevating yields on US government debt. Asian equities came under pressure early on Thursday.Dean Maki, chief economist at hedge fund Point72, called the Fed’s shift “striking” and said it was rooted in speculation about Trump. “It’s hard to see why they would have expected so much higher inflation if they are not incorporating things like tariffs into the forecasts.”JPMorgan strategists echoed that sentiment. “Below the surface, we can see tariff concerns could be seeping through to [the] Fed’s psyche,” they said.Speaking to reporters on Wednesday, Powell acknowledged that some officials had taken a “very preliminary step” to incorporate “highly conditional estimates of economic effects of policies into their forecasts at this meeting”.Asked directly about how the Fed was thinking about its policy response to tariffs, the chair said the committee was “discussing pathways” and working to better understand how such policies would affect the economy.“It puts us in position, when we finally do see what the actual policies are, to make a more careful, thoughtful assessment of what might be the appropriate policy response,” he said.A cut at the Fed’s next meeting, in January, was “absolutely off the table”, said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, citing the inclusion of language in the policy statement that has been used in the past to signal a prolonged pause.Derek Tang, an economist at research group LHMeyer, expects the Fed to hold off on additional cuts until June and eventually deliver a total of three for the year. That forecast hinges on inflation expectations staying in check.Tang said he was also worried about the labour market weakening more than expected should Trump’s policies dent growth, which could create complications for the Fed.“People may be underweighting the scenario where the labour market does weaken and the Fed is now caught between higher inflation but also trying to stop the economy from entering a recession,” said Tang. “It’s a double whammy.” More