The US Federal Reserve appears likely to keep interest rates steady when it meets next week, despite pressure from President Donald Trump for a cut, leaving investors to focus on what chair Jay Powell says about the strength of world’s biggest economy.
The Fed is set to meet on Tuesday and Wednesday, and investors are pricing in almost no chance of a reduction in rates from their current 4.25-4.5 per cent range. Markets expect two cuts by the end of this year, with September likely to be the earliest that rates resume their downward path.
Investors are betting that Powell will continue not to be swayed by pressure from Trump, who on Thursday repeated his call for a full percentage point cut in rates, calling the Fed chair a “numbskull” and saying he “may have to force something”.
Powell was likely to “strike a tone of cautious patience” at the chair’s customary post-meeting press conference, said Gregory Daco, chief economist at EY-Parthenon.
“He will offer little in the way of forward guidance and instead underscore the high degree of uncertainty facing households and businesses,” Daco said.
The Fed’s June meeting follows a smaller than expected increase in US inflation, with the consumer price index rising 2.4 per cent in May, compared with an expected 2.5 per cent increase. Core inflation, which excludes changes in food and energy prices, was static at 2.8 per cent, defying predictions of a slight increase.
Goldman Sachs, which does not expect a Fed rate cut until December, recently bumped up its estimates for this year’s GDP growth from 1 per cent to 1.25 per cent. Signals from inflation and trade policy uncertainty indices have pointed to a “somewhat smaller effect of tariffs on the economy”, Goldman analyst David Mericle wrote.
The bank also put the chance of a recession in 12 months’ time at 30 per cent, down from 35 per cent, “in light of the slightly higher baseline and the lack of any signs of major downside risks emerging so far”, Mericle added. Will Schmitt
When will the BoE next be able to cut interest rates?
With few in the market expecting an interest rate cut by the Bank of England next week, investors will be scouring the minutes and statement accompanying the decision on Thursday for clues as to how policymakers view recent weak economic data and a surge in the oil price.
Markets expect the BoE to continue its pattern, established last summer, of cutting and then pausing, and are placing only a roughly 10 per cent probability on a quarter-point cut to 4 per cent.
Since May’s meeting, the data has largely been weaker. The economy recorded its sharpest contraction since 2023 in April, while wage growth slowed in the three months to that month. Unemployment has edged higher, and business surveys, including purchasing managers’ indices and the BoE’s Decision Maker Panel, point to waning price pressures.
Inflation came in at a higher than expected 3.5 per cent rate in April, but later the Office for National Statistics said it overstated the pace of price growth by 0.1 percentage points due to an error. Fresh inflation figures for May will be published on Wednesday, with markets expecting a fall to 3.4 per cent.
While expecting interest rates to remain on hold, Edward Allenby, economist at Oxford Economics, said any reference to a growing confidence that slack was emerging in the economy would be “a tacit indication that an August cut is the baseline view for a majority of committee members”.
The surge in global oil prices as Israel launched air strikes against Iran complicates the outlook for inflation and is likely to deepen the divisions seen at the last meeting among the members of the Monetary Policy Committee, say analysts.
For June’s meeting, many economists expect seven MPC members to vote for rates to remain on hold, while Swati Dhingra and Alan Taylor are expected to back a cut, amid subdued domestic demand and a drag from higher US tariffs. Valentina Romei
Will the SNB take interest rates into negative territory?
Traders are taking it as a given that the Swiss National Bank will cut its main interest rate from 0.25 per cent to at least zero on Thursday.
The focus instead will be on whether or not it goes for a bumper half-point cut and takes rates into negative territory for the first time since 2022. There is a roughly 30 per cent chance of that happening, according to traders’ swaps market bets.
The stakes are high. Swiss inflation turned negative in May for the first time in four years, and US President Donald Trump’s trade war has lit a fire under the franc, a haven in times of stress, weighing further on consumer prices.
Analysts think the central bank is more likely to use interest rate cuts than currency interventions that could provoke Trump’s ire and make a trade deal more difficult. However, the prospect of negative rates, after the previous eight-year experiment, is also not popular with rate-setters.
Capital Economics expects a half-point rate cut, pointing to weak underlying inflation pressures, the franc’s appreciation and the potential for tariffs and a trade deal to weigh on demand.
“Just as the SNB was concerned about second-round effects during the recent period of high inflation, we think policymakers will be worried about the risk of deflation becoming entrenched,” said Adrian Prettejohn, the research house’s Europe economist. Ian Smith
