Investors will focus on the Federal Reserve’s outlook for the US economy when the central bank finishes its two-day meeting to set interest rates on Wednesday.
Markets overwhelmingly expect borrowing costs to remain unchanged at between 4.25 and 4.5 per cent, based on futures markets prices.
Instead investors will try to gauge chair Jay Powell’s views on future rate moves as companies and consumers assess the consequences of President Donald Trump’s on-off tariff actions.
In February a seemingly resilient US economy led investors to price in a further rate cut only in September, and put a 40 per cent probability on a another move lower by the end of the year.
However, more recent data have suggested US economic activity is slowing while the S&P 500 has fallen sharply, unnerved by a series of unexpected shifts in Trump’s tariff plans.
Investors have priced in two quarter-point rate cuts this year starting in June or July, with a high likelihood of a third by year-end.
“During the press conference, Powell will have to tap dance around policy uncertainty and its cousin market volatility,” said Gregory Daco, chief economist at professional services firm EY. “[He] may find it difficult to reaffirm that the economy is holding up just fine.”
Earlier this month Powell appeared unconcerned following labour market data that undershot expectations, maintaining that the Fed was “well positioned” to wait for greater clarity.
However, some investment banks have already cut their growth forecasts. This week Goldman Sachs lowered its 2025 US growth estimate to 1.7 per cent from 2.4 per cent while Barclays halved its expectations to 0.7 per cent.
Investors will also be combing through the Fed’s quarterly updates of committee members’ economic forecasts including the “dot plot” of their expectations for interest rates.
Markets fell sharply following the last update to the “dot plot” forecasts in December, caught off-guard by members of the Fed board cutting their forecasts for cuts in 2025. Jennifer Hughes
Will the Bank of England shift its outlook on rate cuts?
Investors will watch the Bank of England meeting on Thursday to see if the central bank deviates from its guidance of “careful and gradual” interest rate cuts this year.
The BoE is widely expected to keep its benchmark lending rate on hold at 4.5 per cent and has adopted a steady approach to cutting rates as the UK economy battles low growth. Based on swaps markets, traders expect the bank will make two more rate cuts by the end of the year, to 4 per cent.
However, economists say pressures on the economy have intensified since the last meeting in early February.
Inflation rose to 3 per cent in January, higher than economists had forecast, while in the same month GDP unexpectedly contracted 0.1 per cent. At the same time wage growth has remained strong this year.
But the “elephant in the room” was the uncertainty arising from US President Donald Trump’s tariff policy and America’s disruption of western security alliances, said Sandra Horsfield, economist at the wealth management group Investec.
US tariffs are expected to have an impact on demand in both the UK and its trading partners’ economies, as well as financial markets. The value of sterling has climbed 6 per cent to $1.29 since mid-January while gilt yields have risen from 4.44 per cent in early February to 4.67 per cent, tightening financial conditions.
On the other hand, Germany announced a large fiscal stimulus alongside extra defence spending at EU levels, a move that Horsfield called “a seismic change” that could boost economies across Europe.
Horsfield expected the BoE to hold to its policy of gradual cuts, and to be deeper than market forecasts.
“We still predict three further 0.25 percentage point rate cuts to bring the bank rate to 3.75 per cent by the end of this year,” she said. Valentina Romei
When will the Bank of Japan next raise rates?
The Bank of Japan holds its monetary policy meeting on Tuesday and Wednesday under unusually challenging circumstances, with a mix of geopolitics, external threats and complicated domestic data to digest.
The BoJ has raised interest rates twice in the past year, as it attempts to normalise monetary policy after years of ultra-low rates.
Wage increases, which are a crucial factor in the BoJ’s calculations, appear to be heading for significant headline gains in this year’s spring pay negotiation season.
Still, economists are not expecting governor Kazuo Ueda to raise rates at this meeting: even if the BoJ were not still assessing the impact of its last rise — the move from 0.25 per cent to 0.5 per cent in January — the uncertainties around US tariffs, and the perceived risk of a US downturn are too great.
Investors expect another increase this year but the market is split over a move in the summer, and is only fully pricing in a cut by October. The big question for the yen and Japanese bond markets is the tone Ueda strikes on future moves.
Going into the meeting, yields on benchmark 10-year Japanese government bonds have pushed up to a 15-year high of about 1.58 per cent; the yen has climbed around 5.7 per cent against the US dollar since the start of the year, to ¥148 per dollar.
The BoJ is not seen as likely to respond to the bond yield move with more fixed-rate buying or by raising outright purchases. Leo Lewis
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