Bond Watch: US may not cut rates this year

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.     

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.          

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US interest rates unchanged

The US central bank decided to leave interest rates unchanged this week, at a target range of between 4.25% and 4.5%.

This was in line with market expectations and so yields did not move much following the announcement.

Federal Reserve chair Jerome Powell said that economic conditions in the US meant that he did not “need to be in a hurry to adjust the policy stance”.

This suggests that interest rates could be held for longer than markets expect, given that the US economy grew a little under 3% last year and inflation is at 2.9%.

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AXA Investment Managers now expects no rate cuts in the US this year. Instead, it thinks there will be four rate cuts in 2026, taking the level down to 3.5%.

However, financial markets imply a 20% chance of an interest rate cut in March and are nearly 100% certain of a rate cut in June.

David Page, of AXA IM, said: “Our own view has been that the space for Fed easing has reduced. We had forecast one rate cut this year – at the Fed’s next meeting in March. The marginal adjustment in the Fed’s statement and Powell’s strong insistence that the Fed was in ‘no hurry’ reduces the chances of this.”

However, he adds that depending on the outcomes of two more employment reports and CPI inflation prints before March, things could change and cause the Federal Reserve to cut rates.

“But this no longer seems the most likely outcome,” he said.

Holding interest rates will likely put Powell on a collision course with President Trump, who has previous called for greater interest rate cuts to stimulate the economy.

But the ECB does cut rates

While interest rates in the US were held at 4.5%, the European Central Bank cut rates from 3% to 2.75%.

The cut was expected by economists, but was still well received by markets, with European stocks and bonds rising following the announcement.

Michael Field, chief market strategist EMEA at Morningstar, notes that the cut comes against an uptick in inflation readings over the past few months, to 2.4%.

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“We’ve come a long way since the almost double-digit levels of inflation, and while wages are still catching up, the recent bump in services inflation is likely temporary,” he said.

Economists expect a further 75 basis points of rate cuts in 2025, taking the interest rate to 2%.