Next Fed Cut Could Be in July, Not June
We maintain our call for three cuts this year—75 bp worth of cuts—but we have pushed the first cut from June to July.
Weekly Highlights
Welcome modest gain
On hold for now
Tariff front running
In line with expectations
Weakening
Welcome rebound
Above expectations
Modest retreat
Higher than expectations
US: Fed Is Attentively on Hold
Sometimes, when things are just too complicated, the decision becomes simpler: do nothing, wait. That's where the Fed is right now. We maintain our call for three cuts this year—75 bp worth of cuts, to be precise—which is roughly where the market is as well, but we have pushed back the first cut from June to July. The robust April employment report means no patients in the economic ward require urgent care, so for now there is no need to disburse the medicine.
The current episode is reminiscent of a year ago, when the data suggested rate cuts were warranted yet the FOMC chose to wait, only to then go for a 50 bp cut in September. The same could happen here, although we still view that as the alternative scenario. Chair Powell was right in saying that in 2024 the unemployment rate was moving noticeably higher whereas it has now been hovering in a very tight range for many months. However, just as the Fed Funds rate was more restrictive in 2024 and thus warranted more aggressive cuts, the unemployment rate is already at what is considered to be the equilibrium level. Thus, the scope for letting it rise is much narrower. In fact, any move higher implies a departure from the labor market component of the dual mandate.
By the time of the July meeting (July 30), the 90-day deadline for reciprocal tariffs will have come and gone and there should be much more clarity on trade policy direction, not to mention more data in hand to assess current conditions. Any tariff relief (for China) or the avoidance of full tariff escalation (for others) would cut both ways: lower inflation risks, but also minimize growth risks. It should also allow the recent surge in inflation expectations to subside. In turn, this should facilitate some confidence among FOMC members that some further gentle reduction in policy restrictiveness (after more than a half a year on hold) can be pursued.
BoE: Not Ready for Faster Easing
The BoE delivered another rate cut this week but pushed back on faster easing. Admittedly, the voting was quite divided, with five members voting for the 25 bps cut, two members favoring 50bps cut, and two preferring to keep the Bank Rate at 4.5%.
Still, the MPC’s message was more hawkish than markets had expected. Ahead of the meetings, markets had added at least two more rate cuts for the next three meetings and were looking for signals that the committee was preparing to shift away from their once-per-quarter rate cut approach. Instead, the BoE reiterated that future rate cuts are likely to be “gradual and careful”, indicating low chances of a June rate cut. In addition, the bank highlighted that for most MPC members who voted for 25bps cut this month, “this policy decision would be finely balanced between no change in Bank Rate and a further reduction” prior to US tariffs announcements. The bank also made little change to their growth forecasts. Stronger-than-expected growth in Q1 and positive data revisions led the BoE to upwardly revise growth forecast this year to 1.1% (in line with our expectation) while marginally downgrading 2026 forecast to 1.2% (vs our 1.3%). The MPC assumed that looser financial conditions and lower oil and fuel prices will make up for the impact of US tariffs. On the inflation front, the bank again made minor changes to the forecasts with slightly lower headline CPI inflation in near-term due to stronger sterling and lower oil prices.
Overall, the BoE’s clear pushback against faster easing suggests the bank is not ready to pivot from its gradual approach in June and likely to deliver two further 25bps cuts in August and November. Given increasing slack in the economy, that means the bank would risk ending up with deeper rate cuts later this year. Our current forecasts suggest that services inflation is going to ease faster than the BoE projects. As such, we are comfortable with our base case that the next rate cut will be in August, followed by a faster easing pace in the second half of the year.
On a separate note, the trade deals with India and the US announced this week are unlikely to change the UK’s economic prospects materially. After three years of talk, the UK and India have agreed a deal that also includes lower tariffs for some UK goods in exchange for national insurance waiver on Indian workers moving to the UK. Meanwhile, the details of the deal with the US are still vague at this early stage. However, it was reported that the UK has agreed to ease tariffs on US beef, and ethanol in exchange for a tariff exemption on a part of British steel and car exports. Negotiations will continue but the scope and timing remain unclear.
Nonetheless, the UK has navigated negotiations carefully in both trade deals and avoid compromising with any agreements that appear harmful to talks with the EU. For the UK, closer ties with the latter will provide more substantial boost to its productivity and long-term economic growth given the significant trade between the two. This will, in turn, help in easing the pressure on the UK’s public finances although the extent might not be so significant.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.
Japan: GDP Data to Be in Focus
Japan’s Q1 GDP data will be released on May 16 next week, and the consensus is for a small drag of -0.1% q/q. The monthly Consumption Activity Index (CAI) tracked by the MIAC averaged 1.3% y/y, and is indicating that consumption likely remained positive. However, frontloaded trade in Q1 may lift the overall GDP growth in Q1. We expect a sharp jump in exports, likely surpassing imports. Gross fixed capital formation may have stalled amidst heightened uncertainty. Nonetheless, we expect GDP to have risen 0.3% q/q in Q1.
Our model however factors a slowdown in Q2, and only a gradual economic recovery from thereon.