We have now entered territory where, if rate cuts are realistic, the data will support it. In both the U.K. and U.S., September reductions are increasingly being thought of as probable rather than possible. That said, having missed inflation targets for years via inaccurate forecasting, central banks carry a burden their battered credibility will struggle to bear if they cut too soon and subsequently need to reverse course. Federal Reserve governor, Michelle Bowman, neatly encapsulated matters by noting that while her baseline outlook continues to be that inflation will decline further with rates steady, she still saw a number of upside inflation risks. U.S. 10 year Treasury bonds weakened after her comments.
The clamour for rate cuts often appears to miss that if they are feasible, it is probably the result of weakening demand, which would likely prove a difficult background for equities. After years of experimental monetary policies and central bank interventions, we take nothing for granted regarding the engineering of a soft economic landing. April’s core UK inflation rate of 3.9% illustrates the point.
