The Fed Blinks, the BoE Waits: Diverging Paths, Common Risks

The Federal Reserve’s (Fed) decision to cut rates this week has drawn sharp attention, but few were surprised. After months of speculation, the first reduction since December 2024 arrived against a backdrop of slowing job growth, rising unemployment claims, and persistent inflation. While investors had largely anticipated the move, the Fed’s framing of it as “risk management” leaves markets debating whether this marks the start of a broader easing cycle or a simply a cautious adjustment.

Understanding the Fed’s Move

On Wednesday, The Fed reduced its benchmark interest rate by 0.25%. Chair Jerome Powell justified the decision by pointing to slowing hiring and rising jobless claims, noting that the Central Bank had kept rates steady since December but now saw the balance of risks shifting. The vote produced a single dissent, from a policymaker who favoured a larger cut, highlighting both the growing concern over downside risks and the Fed’s caution about moving too quickly.

For markets, the decision was hardly a surprise. They had already priced in both Wednesday’s cut and the likelihood of additional easing, leaving limited room for an immediate market reaction.

When Policy Is “Priced In”

In financial markets, “priced in” refers to the extent to which expected developments are already reflected in asset prices, based on the market’s assessment of probability. For example, if investors assign a 70% chance that the Fed will trim rates by 0.25% at its next meeting, bond yields, stock prices, and currency levels will move in anticipation of that likelihood – not as if it is certain.

The real volatility arises when central banks deviate from expectations – cutting less, cutting more, or pausing unexpectedly.

This helps explain why Wednesday’s decision had a limited impact on markets. However, it also underscores where the bigger risks lie. Markets have already priced in two further reductions this year, and if the Fed slows its easing path, investors will need to reprice assets quickly, pushing yields higher and potentially weighing on equities.

Risk Management or Start of a Cycle?

Powell characterised the September cut as a form of “risk management” rather than the first step in an aggressive easing cycle. Policymakers continue to highlight inflation, which, at 2.9%, remains above target. If price pressures prove harder to contain, or if the labour market stabilises, the Fed could slow or pause its cuts, challenging investor assumptions of steady and predictable easing.

On the other hand, history shows that so-called “insurance cuts” – aimed at curtailing future risks rather than addressing immediate issues – often occur in succession. Some analysts suggest that if economic data softens further, the Fed could accelerate easing

beyond what markets currently expect, which would likely support growth-sensitive assets while putting downward pressure on the dollar.

Why Cut Rates?

Rate cuts are a monetary tool used to boost the economy when growth slows, or unemployment rises. Lower borrowing costs encourage households to keep spending and businesses to invest, supporting overall demand in the economy. For companies in credit-intensive industries, such as real estate, manufacturing, and capital goods – cheaper financing can make projects more feasible. Rate cuts also tend to stimulate activity in the mergers and acquisitions space as financing becomes cheaper. It can also boost technology and other growth-oriented sectors, as investors are more willing to pursue long-term projects while financing conditions are favourable.

The UK Takes a Different Path

While the Fed cut rates this week, the Bank of England (BoE) chose to hold steady at 4%. It marked the third meeting in a row without a change, even as growth slows and the labour market softens.

The key difference is inflation. In the US, weaker jobs data gave the Fed room to act despite price pressures remaining above target. In the UK, however, inflation is proving stickier. Headline CPI stood at 3.8% in August, with services and wage growth still running hot. Regular pay in the private sector rose nearly 5% year-on-year – well above levels consistent with the BoE’s 2% inflation goal. For policymakers, that meant a rate cut risked undoing progress.

Markets had partially priced in the chance of another cut, but the hold has dampened expectations of rapid easing this year. With seven out of nine Monetary Policy Committee members voting to keep rates unchanged, the message is clear: while both the US and UK face slowing growth, the UK’s more persistent inflation has left the BoE cautious. Future moves will depend heavily on the path of wages and prices over the coming months.

What Does This Mean for Investors?

For US investors, the key question is not whether the Fed cuts, but how far and how fast. A smoother easing cycle would support equities, particularly in growth sectors, while reinforcing downward pressure on the dollar. A slower or interrupted cycle could lead to renewed volatility, particularly in consumer-sensitive industries where earnings are closely tied to spending.

For UK investors, the message is different: policy remains cautious, with inflation data still in the driver’s seat. Holding rates steady may help preserve currency stability, but at the cost of weaker growth support in the near term.

Across both economies, the central bank balancing act remains the same – easing enough to support jobs and growth, without reigniting inflation. Markets may have priced in the first few moves, but the bigger swings lie in whether policymakers ultimately stick to that script.

The Noise

• After the Federal Reserve cut rates by 0.25% mid-week, the US dollar dropped to a multi-year low against several major currencies. But it then recovered as Jerome Powell struck a cautious tone, indicating that while further cuts are likely, they need to be measured and data dependent. The pound weakened modestly as the BoE held rates steady amidst inflationary pressures and concerns of fiscal instability. The mood in Europe remains similarly cautious and saw the euro appreciate against the dollar, though gains were then reversed as the Fed’s cautious tone – hinting at no rush to cut US rates further – petered through currency markets.
• Gold has continued its run, registering its fifth consecutive weekly gain as the Fed’s rate cuts reduce the ‘opportunity cost’ of holding gold. The opportunity cost refers to what you give up when choosing one option over another. In this case, if you choose to invest in gold – an asset which doesn’t yield anything – you are passing up the opportunity to earn interest in the way you would on a bond or in a savings account. Therefore, if interest rates are lower, the opportunity cost of holding gold is lower, hence gold has continued to strengthen through September so far.
• Equity markets continued to move higher in light of rate cuts being supportive for growth, led primarily by Technology in the US. There remains caution around some consumer driven sectors as inflation remains persistently sticky, and the Fed’s rhetoric was notably cautious despite the cut in rates. European and UK equities were mixed with fiscal concerns the primary headwind, as news of unexpectedly high borrowing came to the forefront in the UK. The higher equity markets in the US seemingly defy a lot of the wider noise as US Technology companies relentlessly continue to grow their earnings and drive markets higher.