Central Bank Interest Rates

The Fed has taken a significant step by officially initiating its cutting cycle, which holds profound implications for the financial world. ⚠️The #FOMC has cut the FFR by 50 Basis Points to a 4.75%-5% Range. ⚠️The latest projection of the Neutral Rate, R*, came in at 2.8% versus the previous estimation of 2.9% A cutting cycle might affect other central banks' stance on monetary policy because the US Dollar could devalue considerably going into 2025, making exports from other countries like Japan more expensive. For the past two weeks, business media has made a huge story out of a 25—or 50-basis point cut, but in my opinion, today's decision on the magnitude of the cut is meaningless. Financial conditions have eased considerably since July, so it should not be a surprise that the US economy might have already started to re-accelerate. The Atlanta Fed GDPNow is flashing a Real Growth Rate of 3% for the US Economy. If that materializes, it would mean that the US #Economy is already running 1% above its potential. Why financial conditions have already started to ease? Here are some examples: ✍️Mortgage Rates decreased from 7% in July to 6.15% today ✍️The 2-Year Yield decreased from 4.75% in July to 3.63% today ✍️The 5-Year Yield decreased from 4.06% in July to 3.47% today ✍️Housing Starts have picked up momentum What market participants have priced out is a resurgence of inflation during 2025. That scenario is entirely possible if the Dollar Index drops below 100. A cheaper dollar will make commodities and import prices more expensive for the US consumer, and a reduction in real income could squeeze even more of the low to middle class into the USA. Considering the decrease in US Treasuries for the past two months, I find US Government Bonds expensive across the yield curve at these levels. I think R* is well above what the Fed estimates because of factors like de-globalization, the reshoring of strategic industries, and increased protectionism. The terminal rate post-pandemic is between 3.5% and 4%, in my opinion, and that is where I think this cutting cycle will end. If I am proven right, bond investors must reprice government bond yields higher. How do we play a potential increase in inflation in a no-landing scenario? I tilted my portfolio as I outline here below: 👉Tilt the portfolio to over-weight energy and miners. 👉Have a marginal exposure to Gold and Silver. 👉Favor TIPs over US Treasuries 👉Increase allocation to US Value Stocks and International Stocks. 👉Lock-In US Investment Grade Credit at the belly of the yield curve where we can still get 4.8% to 5% yields, especially on issues at the Single-A Rating Enjoy the ride! #Finance #InterestRates #Economy #Investing

What can we learn from the US yield curve today? The chart below shows the US yield curve today (orange) and one year ago (blue). Before we jump into the conclusion we can derive from the change in curve shape, it's important to understand ''what'' yield curve are we looking at. This is the Overnight Index Swap (OIS) yield curve, not the standard yield curve derived using government bond yields - why? Government bond yields incorporate two dimensions: the risk-free rate set by the Fed (and investors' expectations about where it will be in the future), and something called ''asset swap spread'' on top. The asset swap spread (ASW) represents the compensation that investors require to warehouse US Treasury bonds on their balance sheet rather than simply expressing their long duration view via swaps. Being interest rate derivatives, swaps are a cash-light instrument requiring a small amount of margin to be executed while Treasuries either require the full cash amount (unlevered bond purchase) or balance sheet capacity (repo-funded purchase). Regulation has made balance sheet capacity quite scarse in the US, and so Treasury yields trade at a marked premium to swaps. This is why looking at the Overnight Index Swaps (OIS) curve gives us cleaner signals about investors' expectations for risk-free rates. So, where do we stand today? 1️⃣ The Fed has delivered a cutting cycle which has mildly exceeded expectations from a year ago 2️⃣ Yet, long-end rates today are 20+ bps higher than a year ago 3️⃣ This is because the market now prices in a higher ''neutral rate'' at around 4% Today's OIS curve (orange) sends a clear signal. The Fed is expected to cut rates to around 4%, and that's broadly considered to be the interest rate at which the US economy can operate delivering its potential growth - no overheating, no recession. This is why the yield curve is flat as a pancake, and the Fed is reinforcing this message via their ''long pause'' Fedspeak. Productivity seems to be slowly increasing, but on the other hand the US housing market is showing some early signs of distress - unsold houses are on the rise, and the construction sector stopped hiring. Do you think the new neutral rate in the US is 4%? P.S. If you enjoyed this post, follow me (Alfonso Peccatiello) to make sure you don't miss my daily dose of macro analysis.

Interest rates are not just numbers… they are a reflection of an economy’s stress, stability, and strategy. Look at the extremes. Turkey at 37% and Argentina at 29% — these aren’t “high returns,” they are signals of deep inflation, currency pressure, and economic instability. When rates go this high, it means central banks are fighting to control the system, not grow it. Now compare that with developed economies. The U.S. and UK at ~3.75%, Euro Area at ~2.15%, and Singapore below 1%. These numbers reflect controlled inflation, stable currencies, and mature financial systems. Lower rates here don’t mean weakness — they mean confidence and balance. Then comes the interesting middle. India at 5.25%, Brazil/South Africa/Mexico around ~6.75%. These are growth economies balancing inflation and expansion. Rates are higher than developed markets because growth is faster — but not so high that they choke demand. This is where the real insight lies: 👉 High rates = stress management 👉 Low rates = stability 👉 Moderate rates = growth balancing And this directly impacts markets. When rates are high → borrowing is expensive → consumption slows → equity markets struggle When rates fall → liquidity increases → risk assets rally Which means, interest rates are not just macro data… They are the biggest driver of market cycles. Smart investors don’t just track stocks. They track liquidity. Because in the end, markets don’t move on stories… They move on money flow. Image Source: Trading Economics Follow Chitranjan Singh for more such insights!! #InterestRates #MacroEconomics #Investing #StockMarket #GlobalEconomy #Liquidity

RBA holds interest rates at 3.85 per cent - here's what they are telling us. Despite growing expectations of a cut, today’s decision is a careful pause by the RBA. It was a 6-3 split decision, and the first time the RBA has ever disclosed how individual members voted. That alone is significant in their approach to transparency. Inflation is easing, but not decisively. The trimmed mean sits at 2.9 per cent, which is within the 2–3 per cent band, but “slightly stronger” than forecast. Global volatility and delayed spending are weighing on confidence. Households and businesses are hesitant, and external risks remain elevated. The Board also flagged a still-tight labour market. Wage growth is softening, but weak productivity means unit labour costs remain high, a quiet but persistent inflation risk. This hold is a hedge. With 0.5 per cent points of easing already delivered this year, the RBA wants confirmation that inflation is on track before it moves again. They’re giving themselves space and not declaring victory. Full statement from the RBA >> https://lnkd.in/gi7k-Q2V

Dueling Mandates The Federal Reserve’s dual mandate - to foster price stability and full employment - is rapidly morphing into a dueling mandate. The Fed’s Beige Book revealed that the labor market remains stuck in its low hire, low fire, stagnate mode, while inflation is accelerating. It noted stickiness in service sector inflation and incidents of opportunistic pricing. The latter are price hikes on goods that are not directly tariffed but benefit from the lack of completion that tariffs trigger. Shifts in the data prior to the shutdown further complicated the Fed’s assessment of the economy. Employment was revised down, while economic growth was revised up. That is unusual - understatement. Preliminary reports on the third quarter reveal an acceleration of consumer spending. What we have to ask ourselves is why? Is it due to inequality, doing more with less or a measurement problem? Probably some combination of all of the above. The measurement issue is the most important to the Fed. The official data often is slow to capture rapid shifts in the economy. Staffing shortages are worsening that problem. More than a third of the prices in the August CPI were imputed, as field officers were idled earlier this year. How does that distort our view of the economy? If we are undercounting inflation, then we are overstating economic growth. Chair Powell used the words “may be” when talking about the recent strengths of the economy. Revisions could reveal a weaker economy - that is what doves on the Fed are betting. If they are not, we could have more support for inflation than is understood. Adding to the uncertainty we face is the government shutdown, which leaves us with a dearth of data and could be more consequential to the economy than past shutdowns. It is hitting more workers that past shutdowns with threats of larger cuts & ripple effects to the communities in which they live. The bulk of those workers live outside of the beltway in DC. Another challenge for the Fed is inflation expectations. Research by the Boston Fed suggest that expectations may be becoming unmoored, or normalized. Tariffs typically represent a one-time bump in prices, which is self-correcting. The sequencing of tariffs on the heals of the pandemic inflation has left them mimicking inflation. That could further normalize inflation and make it a self-fulling prophecy. Bottom Line The Fed is left with “no risk-free path” for policy. If it doesn’t cut, it risks a recession. If it cuts too aggressively, it could stoke a more persistent bout of stagflation. That has left it moving with caution instead of certitude, cutting in 1/4 point moves to avert the worst in labor market weakness without stoking inflation. Prospects for 2026 are murkier & could shift with changes in Fed leadership. History is unkind to central banks which prioritize employment over inflation. Any gains in employment tend to be short-lived & stoke a more entrenched bout of inflation.

How does the Fed Rate Cut impact the global economy? Tomorrow, the Federal Reserve is anticipated to announce a rate cut of 25-50 basis points, and while it may sound like a minor shift, the ripple effects of such a decision will be felt across the economy. A Fed rate cut typically leads to lower borrowing costs, which can have far-reaching impacts on both individuals and businesses: 1. Lower Borrowing Costs 🏦 Lower monthly debt payments and more disposable income will enhance the customers' purchasing power. 2. Stock market to go green 📈 When borrowing becomes cheaper, businesses are more likely to invest in expansion, hiring, and innovation increasing share prices as investors foresee costs going down. 3. Gold Prices 🌟 The 24k gold prices in the UAE surged from Dhs 302.5/g to a high of Dhs 313.5, marking an increase of 3.64% within 10 days in anticipation of the rate cut. Gold prices and the Fed rates have an inverse relationship. 4. Reduced FD and Savings rate 💰 Lower interest rates for savings accounts will make it harder for savers to earn a return on their deposits. This disproportionately affects retirees and those relying on fixed income from savings. 5. Housing Market Boost 🏡 With lower mortgage rates, the housing market may see a surge in demand. Homebuyers will find it easier to secure loans, making property ownership more accessible, though this could also push housing prices higher in the long run increasing the rentals. 6. Long-Term Debt and Inflation 📉 While a rate cut might provide short-term economic relief, there’s a concern about increased borrowing and rising inflation. It’s a delicate balance, and we’ll have to monitor how this move impacts inflation over time. A 25-50 basis point cut might seem modest, but its effects will reverberate throughout society. For some, it will mean relief, while for others, it may introduce new challenges. Either way, this decision will influence the economic landscape for months to come, especially as we continue navigating uncertain financial times. Stay tuned for tomorrow’s announcement—how do you think this rate cut will affect you? 🤔 Follow CA Kathit Parikh for more such insights LinkedIn | LinkedIn News #FedRateCut #Economy #FinancialMarkets #InterestRates #EconomicImpact #Finance #Investing

The Federal Reserve is facing a problem that goes deeper than interest rates or inflation prints. I've written my thoughts about it this morning in this article. These are my thoughts. The Fed's own mandate is pulling it in two directions at once and the strain is starting to show. There is a split inside the committee, which became very evident yesterday. Policymakers who share the same data are reaching very different conclusions about where rates should go next. The problem is that the Fed is expected to deliver both stable prices and something it calls maximum employment. The first has a clear target. The second does not. It is a judgement that shifts with demographics, technology and global supply patterns. When inflation remains above target but labour market indicators soften, the mandate offers no obvious hierarchy. Some officials believe employment risks must take priority. Others insist inflation should dominate. This tension matters because it shapes how markets interpret every signal the Fed gives. A divided committee rarely tells a clear story and clarity is the currency central banks trade in. As the world economy changes at speed, does the dual mandate still help the Fed or is it becoming an obstacle to the very stability it is meant to support? The other the question to ask is whether this dual mandate actually threatens the Fed's independence i.e. whatever decision it makes is questioned politically, making it vulnerable to political attack. What are your thoughts?

The Federal Open Market Committee (FOMC) has strongly signaled that they won’t cut the Federal Funds Rate until September at the earliest, and likely only once in 2025 (unless the employment data shows significant deterioration). One reason for this is the FOMC is quite worried about sharp increases in inflation expectations exhibited by both consumers and businesses. Two charts below show these dynamics. Thoughts: •The top chart shows the median point prediction for the year-over-year inflation rate one year from now from the New York Fed’s Survey of Consumer Expectations (https://lnkd.in/g4Tsdtej). As recently as November, inflation expectations were back to 3%, which was the stable, pre-COVID level. Since then, inflation expectations have surged to 4.79% as of April. We know the culprit: tariffs. •The bottom chart shows the expected change in prices paid over the next 12 months for inputs from the Richmond Fed’s manufacturing survey (https://lnkd.in/gvHt3VQa), with data through May. While May’s reading came down to 6.75% from 8.38% in April (likely due to the China tariff pause), we can again see a sharp increase in inflation expectations that can only be due to one thing: tariffs. •Why do inflation expectations matter? In the FOMC’s mind, inflation expectations can turn into a self-fulfilling prophecy. For example, if firms expect to pay more for inputs, it makes it easier for suppliers to raise prices. While I think inflation expectations are often incorrectly predicted (e.g., consumers in 2022 were expecting 8% inflation over the next year, something that certainly didn’t come to pass), the FOMC gives these data weight in their decisions on the Federal Funds rate. Implication: the impact that tariffs have had on inflation expectations this time around, relative to 2018 and 2019, has been far more pronounced. Such increased expectations make the FOMC less likely to cut interest rates before multiple additional months of CPI, PPI, and PCE data are available (barring a sharp deterioration of the job market). I'll be curious if the ruling of the Reciprocal and Trafficking tariffs as unconstitutional has any effect. #economics #markets #supplychain #ecommerce #freight

As universally expected, the RBA's Monetary Policy Board meeting decided (unanimously) to leave the cash rate unchanged at 3.60% (where it has been since August). However the Board's post-meeting statement was less "hawkish" than many other economists had anticipated. In particular, it doesn't give any indication that the Board is contemplating that it might need to lift rates next year (to which the financial markets are now assigning a 100% probability) - beyond the usual concluding sentence that it "will do what it considers necessary" to achieve "price stability and full employment". In particular, whilst acknowledging that #inflation has "picked up more recently", it judged that "some of the recent increase ... was due to temporary factors" and, moreover, that "there is uncertainty about how much signal to take from the monthly CPI data given it is a new data series" (although it is not as if the preceding data for the September quarter was a whole lot more comforting). Against that, the Board's post-meeting statement also conceded that there were "some signs of a more broadly-based pick-up in inflation, part of which may be persistent and will bear close monitoring". It also referenced the strengthening in private demand (evidenced in last week's September quarter national accounts), which it said had been "stronger than anticipated"; the continued tightness in the labour market (evidenced, it said, by the "significant share of firms ... experiencing difficulty sourcing labour"; and the continued strong growth in "broader measures of wages" (such as the national accounts measure of average hourly earnings) and in unit labour costs. The statement concluded by recognizing that "the risks to inflation have tilted to the upside" but also asserting that "it will take a little longer to assess the persistence of inflationary pressures". That doesn't sound like the Board is laying the groundwork for an increase in interest rates any time soon. As I said after the release of the higher-than-expected October inflation data, for the RBA to contemplate lifting rates (so soon after lowering them three times) any time soon, it would need to be persuaded that the recent upturn in inflation represents the beginning of a new upward trend, as opposed to evidence that the "last mile" of getting inflation down from its 2022-23 peak is proving more difficult than previously anticipated. And it will take time to draw a conclusion, one way or the other, on that point. There doesn't appear to be any evidence that a new upward trend in inflation has begun in any other comparable countries (as there was in the early stages of the most recent inflation cycle which began in the aftermath of the Covid-19 pandemic). So for now at least, I remain of the view that the RBA isn't going to raise rates next year, and that there is still a reasonable probability that they will cut again, although in all likelihood only once, and not until May at the earliest.

All eyes are on the Fed’s anticipated rate cut this month, the most significant event shaping market sentiment. We’ve been hearing a lot of concerns that rate cuts signal an economic slowdown and could turn into a negative event for the markets. But is that really the case? In fact, the impact of rate cuts is highly contextual. According to a recent report by the Franklin Templeton Institute, history shows that the effect of rate cuts varies greatly depending on the economic conditions at the time. 📉 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬 𝐢𝐧 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐬 𝐯𝐬. 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐬: • 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: During recessions, rate cuts can initially cause a dip in equity markets. In these periods, equities have historically seen short-term declines, with Treasuries often outperforming as a safe haven. It’s a defensive play, indicating the markets brace for further economic deterioration. • 𝐄𝐱𝐩𝐚𝐧𝐬𝐢𝐨𝐧𝐚𝐫𝐲 𝐑𝐚𝐭𝐞 𝐂𝐮𝐭𝐬: However, when rate cuts occur during economic expansions, the story is entirely different. The report shows that equities tend to rally significantly after rate cuts in expansions, with growth and small-cap stocks leading the way. Historically, the S&P 500, Nasdaq, and Russell indices have all performed exceptionally well following expansionary cuts, with minimal drawdowns. 📊 𝐊𝐞𝐲 𝐒𝐭𝐚𝐭𝐬: • During recessions, equities declined by an average of 4.96% in the first three months post-rate cut, but then rebounded over the next 6-12 months. • During expansions, equities often surged, with the Nasdaq gaining 25.33% over the year following the first rate cut, while the S&P 500 rose 16.66%. So the big question becomes: Has the recent rate hike cycle slowed growth enough to push us toward a recession, or do we still have room for economic expansion? This is the critical factor that will determine whether the upcoming rate cut will spark a bull run or trigger a market pullback. 📈 𝐖𝐡𝐚𝐭 𝐇𝐚𝐩𝐩𝐞𝐧𝐬 𝐍𝐞𝐱𝐭? Historically, during rate-cutting cycles, value stocks perform well initially, but growth stocks take over as the market gains momentum. That’s exactly what we’re seeing right now—growth stocks have been outperforming, a positive sign that the economy could still have room to grow. More than anything, what will truly define the trajectory of the markets is how well the Fed manages to navigate the “soft landing”—balancing the slowing inflation without stalling economic growth. This delicate balance will be crucial in determining whether the upcoming rate cut sparks growth or reinforces recession fears. #MarketInsights #RateCuts #Investing #FedPolicy #GrowthStocks #EconomicExpansion #StockMarket #Treasuries