Back to 0%?

‘Someone has to pay,’ said Federal Reserve (Fed) Chair Jerome Powell at yesterday’s post-decision presser, after the Fed kept rates unchanged as widely expected – and priced in – by global markets. “Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs, because someone has to pay for the tariffs,” he added.

Accordingly, the Fed raised its year-end inflation forecast to 3.1%, up from 2.8% pencilled in in March, and lowered its 2024 growth forecast to 1.4%, down from 1.7%.

The dot plot still shows two rate cuts this year – but that median projection doesn’t tell the full story. There’s now a growing divide within the Fed: while 8 members expect rates to fall by 50bp (matching two cuts), 7 see no change – up from just 4 at the previous meeting. Two members anticipate one cut. That’s now almost a 50-50 split between no cuts and a 50bp reduction.

The market reaction to the Fed decision wasn’t exactly cheery. The S&P 500 fell after the decision, though the US 2-year yield eased. Meanwhile, Fed funds futures show a slightly higher probability of a September cut than before the meeting. Investors seem inclined to see the glass half full – hoping for two cuts – rather than half empty, with none.

The US dollar was in doji mode yesterday but is stronger this morning, perhaps supported by a relatively cautious Fed tone and some flight to safety. There are rumours the US could become directly involved in Middle East tensions as soon as this weekend. That alone could attract defensive flows into the dollar ahead of a potentially critical weekend – regardless of Fed policy.

There’s also little reason to pile into risk assets amid such elevated geopolitical risk. If tensions escalate, there’s arguably no better shelter than oil, gold, the US dollar, and the Swiss franc.

Fun fact before we move to the BoE and SNB: Powell’s term ends next May, and he’ll likely be replaced by someone more aligned with Trump’s preference for lower rates. Traders are already selling March 2026 SOFR contracts and buying June ones in anticipation.

But here’s the catch: if Powell’s successor cuts rates without a solid macro rationale – just to please Trump or boost risk sentiment – markets might not respond as expected. Remember last September, when Powell cut by 50bp despite no urgent need? Yields actually rebounded. Bottom line: rate cuts only help risk assets if markets believe they’re justified.

US and European futures are down, with the exception of FTSE futures, which are pointing higher thanks to a softer sterling and stronger appetite for energy and defence plays as geopolitics heat up.

BoE preview

The Bank of England (BoE) is expected to keep rates unchanged today, but debate is likely to be heated both within the MPC and outside it.

While yesterday’s data showed inflation cooling more slowly, the dovish chorus remains loud, still questioning the reliability of ONS data and worried that the budget might be doing more harm than good to the UK economy.

Markets now expect the BoE to stand pat this month, but signal a cut in August.

Cable is down this morning, testing its 50-DMA to the downside – partly on the back of a stronger dollar, and partly due to some unwinding of dovish BoE bets after the CPI print.

While cable’s direction is often more tied to broader dollar dynamics, the EURGBP’s recent surge warns that markets are losing confidence in the UK growth story... just saying.

Back to 0%?

The Swiss National Bank (SNB) will likely lower its policy rate to 0% this morning, as trade uncertainty lingers and the franc stays firm.

Even though rising geopolitical tensions helped put a floor under the USDCHF last week, the EURCHF still trades near its lowest levels since the euro launched, and is not looking like it would reverse course anytime soon.

Of course, a rate cut may not even dampen franc demand and the SNB could be brought to revisit negative rates later this year, or the next.

Low interest rates support investment and growth. But negative rates, while sometimes effective, can distort financial system equilibrium. They squeeze commercial banks, reduce profitability, and weaken lending capacity – ultimately weighing on the economy. Excessively low rates also risk over-indebtedness, deter foreign investment, and challenge Switzerland’s ability to attract capital.

The SMI has notably lagged US and European peers since the April 2 rebound, partly due to the strong franc, partly due to trade uncertainties.

When it comes to franc, Switzerland has weathered a strong franc for decades. Its financial and industrial bases are solid, and investor confidence in the Swiss economy – beyond banks and chocolate – remains anchored in innovation and specialization. But trade uncertainties are proving toxic, and it’s not clear that lower rates alone will offer much of an antidote.