The absence of frontline US economic data and a slew of hawkish comments from Fed officials has seen market-implied expectations for a 25-bps December rate cut from the Fed slide from over 100% to just over 40%. In short, December now seems to be a toss-up. Steven Barrow, Head of Standard Bank G10 Strategy, still leans to the view that the Fed will cut rates.

Those members suggesting caution are doing so on the basis that inflation is not close enough to the 2% target but the Fed has been missing its 2% PCE price target since March 2021 and, in the past year, or so, has cut rates by 150-bps. In short, if the Fed was serious about getting inflation back to target, it would not have cut rates before now; or at least not as much.

The problem the market faces, besides the recent absence of key economic data, is that investors know that the Fed’s composition will change importantly next year with Chair Powell stepping down next May. Treasury Secretary Bessent is lining up candidates that will likely be sympathetic to President Trump’s wish for lower rates.

As a result, there is speculation that, even if the current Fed does not deliver the terminal rate of around 3% that is priced into the market, it will likely be delivered once Powell has departed. The result is that, while market pricing of near-term rate cuts is shifting, longer-term pricing is still anchored around the 3% level due to this Fed composition effect. But the problem for the president is that Fed rate cuts are not delivering significant declines in mortgage rates as long-term treasury yields have stayed quite high.

For instance, while the Fed may have cut rates by 150-bps so far the 30-year mortgage rates has only fallen by around 25-bps over this period. This is a key motivation behind Trump’s proposal for a longer 50-year mortgage but cynics will clearly argue that the best way to reduce mortgage rates is to cut government debt; not expand it by close to USD2.5tr over the next decade as independent estimates suggest.

We continue to believe that longer-term bond yields will remain pretty impervious to future Fed easing and still feel that 10-year yields are more likely to rise to 5% than fall towards 3% even if this latter rate is the final destination for the fed funds target rate in this easing cycle. While the market is pricing the base of the Fed easing cycle to be close to 3%, the base of the Bank of England’s easing cycle is around half a percent higher at 3.5%. Inflation persistence accounts for some of this gap given that the UK’s price performance has generally been worse than that of the US”, said Steven Barrow.

However, there are some counterweights. US fiscal policy is generally on an easing path after President Trump’s one big, beautiful bill earlier in the year while the UK government is being forced to lift taxes and rein in spending in order to keep its fiscal targets on track. Apprehension about the measures that could be taken on this front by Chancellor Reeves in the November 26th budget seems as if it might have been partly responsible for sub-par growth in Q3. The BoE could not properly acknowledge this fiscal threat to growth at the last meeting because, as Governor Bailey said, the bank reacts to announced fiscal policies; not policy rumours.

Steven Barrow suspects that, once the budget is released, the path will be open for a 25- bps rate cut at the December 18th MPC meeting. But, like President Trump, the UK government recognises that gilt yields are key. For while the UK does not have the same mortgage rate considerations as the US given that mortgage rates are set off the base rate, and not longer-term yields, there is still the issue of huge debt interest payments to consider. These payouts have reached around GBP110bn per year; nearly three times higher than in the last year before the pandemic.

The problem the chancellor faces is that owners of gilts are easily spooked. But while the gilt market crisis of September 2022 showed this vulnerability in abundance, it was a crisis created by fiscal irresponsibility by the Conservative government under former PM Truss. If there is a crisis over the coming budget it will likely be because the government is trying to be too fiscally responsible, so putting its longevity at risk. Steven Barrow does not expect a crisis in the market but the lower yields the chancellor craves may still prove elusive.