The U.S. Federal Reserve kept its key interest rate unchanged and guided that just one reduction might be expected before the end of 2024. It added that it believes the long run interest rate (however one defines such a number) is higher than previously thought. Not that long ago, there was realistic chatter of 5 cuts this year but not for the first time, rose-coloured spectacles have proven to be a poor substitute for reality.
Looking at the Fed’s ‘dot plot’, which illustrates what its 19 members expect for 2025, 4 cuts (i.e. one full percentage point) are being pencilled in. We are tempted to suggest that looking at the track record of previous predictions, investors would be wise to add more than a couple of pinches of salt to this forecast.
The European Central Bank cut its benchmark rate for the first time in 5 years following 10 hikes since the commencement of the current rate increasing cycle, in July 2022. Curiously, it simultaneously raised its inflation outlook for both 2024 and 2025 which seems a very odd background to a rate reduction. In the UK, inflation is finally back to its 2% target yet service sector inflation is presently 3.7%, while core inflation (ex volatile components such as food and fuel) stands at 3.5%. Whatever the headline rate may be, such numbers illustrate our main concern which is that inflation now persistently lurks in the shadows of debt ridden, spendthrift developed economies.
