The Bank of England's dovish 5-4 vote to hold rates conflicts with its more cautious forward guidance. This mixed messaging suggests a near-term rate cut is likely but creates significant uncertainty about subsequent easing, which will limit the total number of cuts the market can price in for the year.
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Despite strong economic data suggesting the Fed should hold rates, markets are pricing 40-50 basis points of cuts. This discrepancy is driven by political uncertainty around the appointment of a new Fed Chair, as the administration's focus on lower rates makes it difficult for markets to price out easing until the new leadership is confirmed.
A significant policy divergence is expected in Europe. The ECB is forecast to hold rates steady, balancing cyclical growth against structural weaknesses. In contrast, the Bank of England is projected to deliver three cuts, driven by the UK's unique combination of rising unemployment and a rapidly improving inflation outlook.
Despite conflicting inflation data, the Federal Reserve feels compelled to cut interest rates. With markets pricing in a 96% probability of a cut, failing to do so would trigger a significant stock market shock. This makes managing market expectations a primary driver of the policy decision, potentially overriding pure economic rationale.
The market is pricing in approximately three more rate cuts for next year, totaling around 110 basis points. However, J.P. Morgan's analysis, supported by the Fed's own dot plot, suggests only one additional cut is likely, indicating that current market pricing for easing is too aggressive.
Internal Bank of England models now indicate its policy stance might have shifted to neutral or even slightly accommodative. This internal uncertainty about the true restrictiveness of rates could limit how much further easing the UK market can price in.
The Fed projects the unemployment rate will average 4.5% in Q4—a significant increase—yet it only forecasts one additional rate cut in 2026. This inconsistency suggests the Fed may be forced to deliver more cuts than currently communicated if its own unemployment scenario materializes.
The market's significant reaction was not to the anticipated rate cut, but to Chair Powell's direct press conference statement that a December cut was "not a foregone conclusion. Far from it." This demonstrates how a central bank chair's specific phrasing and communication style can be a more powerful market-moving catalyst than the policy decision itself.
A surprisingly close 5-4 vote to hold rates reveals a deep split at the Bank of England. Governor Bailey is now the pivotal vote, and his stated data dependency and focus on downside economic risks will determine the timing of future cuts.
The recent 25-basis-point rate cut, accompanied by strong dissents and cautious guidance, signals deep conflict within the FOMC. This "hawkish cut" reflects uncertainty about whether labor market weakness or inflation is the bigger threat, making future policy highly unpredictable.
Jerome Powell's "driving in fog" analogy highlights the Fed's strategy of using uncertainty, such as a government shutdown delaying economic data, to justify slowing down policy changes like rate cuts. This gives them flexibility to guide markets later through speeches without being locked into a specific path.
