The fashionably late Federal Reserve

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Chart of Federal Reserve decisions over the years in countries like the US, UK, Canada, Japan and Brazil, among others — © Alan Smith and Hakyung Kim

Good morning. Holiday season? Nah. It’s central bank rate-setting decision season. As markets anticipated, the US Federal Reserve cut borrowing costs by a quarter point on Wednesday, bringing the federal funds rate to a range of 3.5 per cent to 3.75 per cent. Next week, announcements will follow from the Bank of England, the European Central Bank and the Bank of Japan.

Since the start of the pandemic in March 2020, monetary policy across major central banks has largely moved in step. The initial emergency rate cuts were mostly synchronous, and the Fed’s subsequent tightening in 2022 was within months of its European counterparts. But the US central bank was notably late to join the current easing cycle, particularly compared to many of its emerging markets peers. Several central banks, including the ECB, have signalled they are nearly done cutting. This leaves the Fed an outlier, along with the BoJ, which is grappling with persistent above-target inflation, and Brazil’s central bank, which has reversed course to rate increases again after easing too aggressively.

In short, the rate differential between the US and other countries is narrowing. The US had been a higher-rate destination for capital; now its rates are becoming relatively less attractive.

According to Benjamin Shoesmith, senior economist at KPMG Economics, “The biggest spillover from this depends on what the Fed does next year. But if it cuts aggressively in the second half of next year under the new Fed chair, then the pull down in US rates would make other countries more attractive investment destinations, which could create a form of capital movement away from the US.”

This could weaken the dollar, making imports for US consumers more expensive but US exports more competitive, as Trump has long desired. Tell us your outlook for 2026: unhedged@ft.com.

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