Hopes for ‘aggressive’ interest rate cuts fade

Hopes for aggressive interest rate cuts faded yesterday on both sides of the Atlantic, in a blow to millions of borrowers.

US employment figures showed that 254,000 jobs were created in the world’s largest economy last month, exceeding the forecast of 140,000.

The strength of the US labor market took many observers by surprise and fueled expectations that the US Federal Reserve will take a more gradual approach to cutting interest rates.

In Britain, Bank of England chief economist Huw Pill urged “caution” and warned against “cutting rates too far or too quickly.”

The comments contrasted sharply with language used just a day earlier by Governor Andrew Bailey, who said the Bank could be “a little more aggressive” if inflation remains under control.

The prospect of interest rates falling only slowly in the United States and the United Kingdom was felt in financial markets.

With US jobs figures suggesting the Federal Reserve will not repeat the extraordinary 0.5 percentage point cut seen last time, the dollar strengthened further against the pound and sterling fell below 1, 31 dollars.

Sterling had hit a two-and-a-half-year high above $1.34 last week, but has fallen sharply in recent days. Ten-year U.S. Treasury yields – a measure of government borrowing costs – rose to just under 4 percent, the highest level in nearly two months. UK ten-year bond yields hit their highest level since late July.

Fears about a worsening labor market had led the Federal Reserve to announce a massive half-percentage point – or 50 “basis points” – interest rate cut last month.

However, earlier this week, Federal Reserve chief Jerome Powell said he was in “no rush to cut rates quickly” as those fears eased amid positive economic data.

And Larry Summers, former US Treasury secretary, said yesterday: “In retrospect, the 50 basis point cut in September was a mistake.”

Matthew Ryan, head of market strategy at financial services firm Ebury, said the jobs numbers “should allay any lingering fears about the state of the U.S. economy, which is not only growing at a solid pace but continues to create jobs at a very healthy rate in fact.

Ryan said a second consecutive half-point cut was now “off the table” and a more “standard” quarter-point reduction was likely instead. Paul Ashworth, chief North American economist at Capital Economics, said: “The real debate at the Federal Reserve should be about whether or not to ease monetary policy.”

‘Any hope of a 50 basis point cut has long gone. “We continue to expect the Federal Reserve to take a more measured approach.”

Adding to the whirlwind of considerations for global rate-setters is the conflict between Israel and Iran, which has already driven up oil prices sharply, a trend that, if it continues, could also prove an obstacle in the battle to keep oil prices down. inflation.

Pill noted during a speech in London yesterday that it was the global shocks of the pandemic and the invasion of Ukraine that caused the most recent inflationary episode and that rate setters must remain vigilant.

He said it was “important to guard against the risk of cutting rates too much or too quickly” and added that the need for “caution” points only to “gradual” reductions in borrowing costs.