US
USD is holding to its post-Fed rally, 10-year Treasury yields are retreating, and S&P500 futures are up. The FOMC delivered a hawkish hike. Immediate market reaction saw USD and short-term yields rise, while stocks dropped. 10-year inflation breakeven rate fell, reinforcing the Fed’s inflation fighting credibility.
As was widely expected, the FOMC delivered a 25bps hike to a target range of 3.75%-4.00% after five straight holds, marking its first hike since July 2023. It was hawkish hike because:
(i) The decision was unanimous.
(ii) 2026 dot moved towards market pricing pointing to another 25bps hike by year-end.
(iii) Real GDP growth was revised higher for 2026 and 2027.
(iv) The unemployment rate was tweaked down across the forecast horizon.
(v) PCE inflation is forecast to reach the 2% target a year later in 2029.
Importantly, Fed Chair Kevin Warsh signaled the Fed still has more work to do to bring inflation back to target. Warsh stressed that “inflation is too high and has been for too long” adding that underlying inflation trends have not “meaningfully improved.” Warsh pointed out again that “too many categories are still posting increases above 3 percent, on both a 6- and 12-month basis.”
Bottom line: tightening by other major central banks limits policy divergence and suggests USD is unlikely to make new cyclical highs. But the US growth advantage relative to other major economies skews USD risk to the upside.
Second tier US economic data on deck today: September Philadelphia Fed business outlook survey, weekly initial jobless claims, and August housing starts/building permits.
UK
BOE holds and signals a low bar for a hike. As was widely expected, the Bank of England (BOE) voted by a majority of 6-3 to keep the policy rate at 3.75% for a sixth straight meeting. Once again, Megan Greene, Catherine L Mann and Huw Pill backed a 25bps hike. BOE noted “there has been little evidence so far of material second-round effects in price and wage-setting.” Indeed, easing UK wage growth and services inflation gave the BOE room to stand pat.
However, Governor Andrew Bailey warned that “if the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten.”
The BOE also announced plans to slow the pace of quantitative tightening (QT) with a predictable multiyear plan. Its gilt holdings will fall by an average of £46bn a year, through 2034, including £20bn of annual sales. That’s down from an £87.5bn average reduction and £32bn of sales over the past four years. The slower QT runoff pace supports gilts, but elevated energy prices remain the bigger driver. Unless energy prices ease in a sustainable way, gilt yields will stay under upward pressure.
The swaps curve implies about 100bps of BOE rate hikes in the next twelve months to 4.75%. In our view, the BOE may not need to tighten as much as markets expect. The UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BOE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive. Bottom line: GBP is vulnerable to a dovish BOE repricing.
