Fed yesterday, BOE today

Fed keeps interest rates unchanged

The Federal Reserve decided to maintain the target range for the federal funds rate at 5.25%-5.5%, marking the second consecutive time that the central bank has opted to leave interest rates at their 22-year high. This move underscores the Fed's dual focus on achieving its 2% inflation target while treading cautiously to avoid excessive monetary tightening. Powell and his fellow policymakers emphasized that any further policy adjustments would consider the cumulative impact of previous interest rate hikes, the time lags associated with the effects of monetary policy on the economy and inflation, as well as developments in financial markets.

During the press conference, Powell indicated that the September dot-plot, which showed the majority of participants forecasting one more rate hike this year, may no longer accurately reflect the central bank's stance. While he made it clear that the Federal Open Market Committee (FOMC) had not discussed rate cuts at this stage, the primary focus remains on whether additional rate hikes will be necessary.

Bank of England in the spotlight

Today, all eyes turn to the Bank of England as it deliberates whether to adjust interest rates. While it's expected that the central bank will follow in the footsteps of the Fed and keep rates steady, the nuances of their decision are likely to differ significantly. After raising rates 14 consecutive times, it's becoming increasingly apparent that the bar for further hikes is set quite high. The Bank of England seems to be embracing a policy of "higher for longer" as it cautiously assesses the economic landscape.

Although some hawkish members of the Monetary Policy Committee (MPC) are advocating for higher rates, the prospect of further hikes may wane if inflation continues to slow, as anticipated when October's inflation figures are released later this month. Notably, the reduction of the energy price cap in October should contribute to a sharp drop in inflation compared to a year ago.

Sticky wage growth is another concern for the central bank, but even in this domain, there is a sense that wages have likely peaked, remaining at 7.8% for the last three months, despite the ongoing deceleration of headline inflation. Next week's release of Q3 GDP numbers is expected to reinforce worries about a weaker UK economy.

Today, there should be sufficient evidence for a majority decision to maintain current interest rates, possibly with one or two of the four hawks who voted for a hike in September choosing to uphold the status quo while revising their GDP forecasts. Among these, external members Megan Greene and Jonathan Haskel may be the most likely to shift towards a hold position. Meanwhile, there have been suggestions that Swati Dhingra, the lone dove on the MPC, might lean towards a rate cut, which could significantly impact the British pound. Given the persistently sticky inflation, such a move would likely be deemed a considerable risk and might not be necessary, especially when considering the already notable decline in UK gilt yields from their summer highs.

Corporate developments

In the corporate realm, Disney has announced its intention to purchase Comcast's one-third stake in Hulu for a price exceeding $8.61 billion. An appraisal process is underway, with the deal expected to close next year. Meanwhile, investors eagerly await Apple's financial results after the market close, as they seek the first indications of the sales performance of the new iPhone 15.