Good morning,


On Thursday we saw what differing economic recoveries look like as the ECB and Federal Reserve went their separate ways in terms of policy. Sometimes the best course of action is to do nothing, the conclusion the FOMC took on Wednesday when they paused in raising rates. The ECB on the other hand announced a further 0.25% rise. Of course, these differences are relative. The Fed has raised interest rates 10 times since March of 2022 by a cumulative 4.75%. Over the same period the ECB has raised rates 8 times by a cumulative 4%.


A point of interest for many investors was the Fed’s guidance surrounding the decision to pause. A doveish action by the Fed was followed by hawkish comments, causing some level of confusion. During his speech Chairman Jay Powell Powell’s comments indicated that another rise was on the table.


Analysts and the media spend a lot of time analysing Powell’s linguistics and even his body language in order to figure out where the Fed’s policy path will go. Over the last number of decades, the use of words to guide markets has increased in importance. Central banks have to walk a thin line when using speeches as a policy tool. These forms of guidance can often be overt such as Mario Draghi’s infamous ‘Whatever it takes’ speech, but can also be extremely subtle. On Wednesday Powell corrected himself in accidentally referring to the decision as a ‘skip’ insisting it be known as a ‘pause’ instead. While this may seem a small difference, it shows the importance the Fed places on market expectations and how much influence one institution in its words alone has over the market.  


For our own outlook on inflation expectations and more see our investment conference slides from last week, available here.


As always, if you wish to discuss anything in further detail, please do get in touch.