Fed cuts rates by 25bps

The US Federal Reserve cut rates by 25bps yesterday, in line with our and market expectations. This, the first rate change from by the FOMC since December, takes the upper bound of the benchmark Fed funds rate to 4.25%. The Fed’s focus has clearly changed from concern around the potential inflationary impact of tariffs on imports to the US, with Fed Chair Jerome Powell saying in his press conference that ‘the case for there being a persistent inflation outbreak is less’, to worries around a weakening labour market, and Powell noted that ‘the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant.’ While CPI inflation did tick up to 2.9% y/y in August, the impact of tariffs still appears fairly muted, while on the other hand recent jobs figures have come in consistently weaker, not least the sizeable revision to payroll data seen last week. The FOMC decision was not unanimous, as recent President Trump appointee Stephen Miran voted for a larger 50bps cut, but this was the only dissension compared with two at the previous meeting, with both Christopher Waller and Michelle Bowman voting with the majority this time.

The cut was not an overly dovish one and Powell noted that there remained a risk of tariff-related price pressures becoming entrenched, warning that it would be a ‘meeting-by-meeting situation.’ Nevertheless, the updated Summary of Economic Projections showed that most voting members expect a further 50bps of cuts this year, presumably in two more 25bps moves. In 2026, the median projection is for just one more 25bps move lower, a more conservative outlook than expected by most analysts or predicted by markets. The outlook for inflation in 2026 was unchanged from the June meeting at 3.1%, while 2025 is now predicted at 2.6%, from 2.4% previously. The growth outlook for both this year and next was revised up by 0.2ppts, to 1.6% and 1.8% respectively, while unemployment was little changed, with this year’s projection improved modestly to 4.4%, while next year remains at 4.5%.

The rate cut has been matched by in the GCC given that the currency pegs mean that monetary policy tends to move in lockstep with that of the Fed. The UAE, Saudi Arabia, Qatar, Bahrain, Oman, and Kuwait central banks have all cut their benchmark policy rates by 25bps.

UK CPI inflation was static at 3.8% y/y in August, unchanged from the July print and in line with expectations. This means annual price growth remained at its highest level in one and a half years. The data release came the day before the Bank of England is scheduled to set rates later today and makes a hold from the MPC even more likely, with a chance of an extended pause going forward. Core inflation slowed modestly to 3.6% y/y, down from 3.8% previously, while services inflation was at 4.7% – down from 5.0% in July but still elevated. Restaurants & hotels was the largest contributor to the headline measure, with the series of Oasis music concerts in the month likely contributing to this.

Today’s Economic Data and Events

15:00 UK Bank of England rate decision. Forecast: 4.0%

16:30 US initial jobless claims, week to September 13. Forecast: 240,000

17:00 South Africa SARB rate decision. Forecast: 7.0%

Fixed Income

• The less dovish than expected commentary, and the fact that the dot plot shows only a 25bps move lower next year, prompted a sell-off in USTs, with yields rising across the curve.
• The 2yr yield closed 5bps higher at 3.5531%, while the 10yr was up by 6bps at 4.0872%.

FX

• The dollar index strengthened yesterday after the FOMC meeting, snapping two days of losses as it closed up 0.3%.
• EUR fell back from its multi-year high set the previous day to settle at 1.1813, down 0.5% on the day, while GBP weakened by 0.2% to 1.3626, despite the elevated inflation print earlier in the day casting doubts on the BoE’s own easing trajectory. JPY sold off by 0.4% to 146.99.

Equities

• US equities were mixed following the fairly dovish FOMC decision and dot plot revision. The blue chip Dow Jones closed up 0.6%, but the more rate-sensitive S&P 500 and NASDAQ lost 0.1% and 0.3% respectively.
• Locally, the DFM dropped 0.1% and the ADX 0.2%. Saudi Arabia’s Tadawul added 1.3% on the day.

Commodities

• Oil sold off yesterday, with Brent futures down 0.8% on the day to USD 68.0/b, while WTI fell 0.7% to USD 64.1/b.
• US EIA data showed a sizeable 9mn bbl drop in crude stockpiles last week to roughly 415mn bbl, the lowest level since June.