30 October 2025: The Fed’s cutting bond sales will pressure the BoE

In a particularly rowdy Prime Minister's Questions in the House of Commons yesterday, Sir Keir Starmer flatly refused to confirm that taxes will not rise in next month's budget. Flanked by his Chancellor of the Exchequer, Rachel Reeves, he refused to tell MPs that he stands by his pledge not to raise income tax, VAT or National Insurance. This led the Conservative Leader to say to the House that it's now clear that tax increases are imminent.

Some senior Labour figures are privately telling Chancellor Rachel Reeves that now is the time in Parliament to make the case for raising income tax.

They argue it could raise a lot of money and, unlike more targeted tax rises such as last year's changes to inheritance tax on farmland, would not create a single noisy lobby group in opposition.

But the idea leaves other Labour figures deeply nervous because it would amount to a spectacular breach of their pre-election promise, which ministers have repeated many times since. Some also worry it could depress the economy further at a time of weak economic growth.

Rachel Reeves has found a viable scapegoat for the country’s high inflation and lack of meaningful growth. She has heaped blame on Brexit for the current state of the economy, claiming that the country could reap enormous benefits from a closer relationship with Brussels.

Reeves admitted that inflation is too high and claimed that this is partly due to the UK officially severing ties with the EU almost six years ago. She has yet to begin blaming the previous Government's handling of the COVID-19 crisis, but she may be trying to find a way, though she is unlikely to say how the present Government would have handled the key decisions differently.

The Bank of England Governor would have noted with interest that the Federal Reserve has decided to slow down its bond sales. Instead of allowing up to $5 billion in Treasury securities to mature each month, the Fed said that beginning on December 1, it would seek to hold steady its stock of government bonds by rolling over maturing Treasuries.

Andrew Bailey has faced criticism, mainly from Reform UK Leader Nigel Farage, for his actions that have led to longer-term interest rates rising to their highest level in almost 30 years. This is having a material effect on mortgage rates.

Goldman Sachs has predicted that the Bank of England will cut interest rates next week, providing relief for millions of borrowers.

Analysts at the investment banking giant argue that fading inflation pressures and sluggish growth will open the door to a move sooner than most other analysts and traders expect.

In a note to clients, Goldman’s experts said they had changed their minds after the latest data amounted to a ‘convincing case for a cut next week’.

It came as the Federal Reserve cut US interest rates for the second meeting in a row last night, even though inflation has climbed to 3 percent for the first time since June 2024.

There is still formidable opposition to a change in monetary policy from both permanent and independent members of the Monetary Policy Committee. Most notably, the Bank’s Chief Economist said recently that the Bank should adopt a conservative approach to setting interest rates.

The pound continued to lose ground against the Euro yesterday, falling to a low of 1.1340, though it attracted some buyers at lower levels, closing at 1.1373.

Fed Chair Jerome Powell announced yesterday that the Federal Reserve is cutting the overnight lending rate by a quarter of a percentage point, bringing the benchmark rate to 3.75% to 4%.

The vote among the governors was 10-2.

The Fed also announced that it would end the reduction in its asset purchases on Dec. 1. The reduction, also known as quantitative tightening, is intended to improve the Fed’s balance sheet and slow inflation. It decreases the amount of money supply.

Lack of economic data because of the government shutdown has hindered the decision-making of the Federal Open Market Committee, the policymaking arm of the Fed, Powell said. Reports on monthly jobs, gross domestic product, trade data, housing information, retail sales, and manufacturing and inventory statistics have been paused.

But evidence shows that layoffs and hiring remain low, and that households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue to decline in this less dynamic and somewhat softer labour market, Powell said. “The downside risks to employment appear to have risen in recent months.”

However, Powell was careful not to commit to a further cut this year at the final meeting of this year, which will take place on December 9/10.

He said the members of the Federal Open Market Committee were not unified about December’s next decision.

Data available before the shutdown show that growth in economic activity may be on a somewhat firmer trajectory than expected, primarily reflecting stronger consumer spending,” Powell said.

“In the committee’s discussions at this meeting, there were strongly differing views about how to proceed in December,” he said. “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.”

In its September statement, the FOMC predicted it would lower benchmark interest rates through two quarter-point cuts by the end of the year. President Donald Trump, however, has called for cuts up to 3%.

Trump appears to have forgotten that the Federal Government is shut down. He continues to go on foreign tours, playing golf and making threats about tariffs as if everything is running normally, which is not the case.

The shutdown is reportedly costing the economy $14 billion a day, but Trump is leaving the arguments to Congress.

The dollar index rose after the rate cuts and Powell's comments at the December meeting. It climbed to a high of 99.36 and closed at 99.15. There is still strong interest in selling on any approach to the 100 level, but buyers will emerge near 98.20.

Christine Lagarde put into words yesterday what several of her colleagues on the ECB’s Governing Council have felt for some time.

She renewed her call to revamp decision-making within the European Union, pushing for majority voting to improve the bloc's functioning.

“Even when we can agree on what must be done, our governance often prevents us from doing it decisively enough,” Lagarde said Wednesday in Florence, Italy. “It has become too slow, too complex and too much of a hostage to individual member-states wielding vetoes.”

“We can use the possibilities within the Treaties, such as the ‘passarelle’ clauses, to make more decisions by qualified majority, rather than unanimity, when collective action is in our shared interest,” Lagarde said, echoing earlier remarks.

Single-country vetoes have long been an issue for the EU, with Hungarian Prime Minister Viktor Orbán repeatedly using the tool, especially since Russia’s invasion of Ukraine. This has made it harder for the bloc to speak with one voice on global issues and has tested the limits of its consensus-based approach to policymaking.

Lagarde, a former French finance minister and IMF chief, has repeatedly called for the EU to use the current bout of global uncertainty to establish greater autonomy. In her speech, she also suggested an approach “where common European rules apply without waiting for full convergence in national systems, allowing innovators to scale more quickly.”

“We can deepen cooperation among groups of countries willing to move faster – not as exclusive clubs, but as pioneers whose progress ultimately strengthens the whole,” she said. “Europe is resilient, but it is also vulnerable.”

Economists say that the increase in German Government spending on infrastructure projects and the bolstering of its defences will not turn out to be the panacea the entire region is craving.

After years of stagnation, the German economy will receive a boost from increased government spending on defence and infrastructure. Still, a failure to implement flanking structural reforms will limit the boost to medium-term economic growth.

In recent weeks, numerous media reports have cast doubt on German Chancellor Friedrich Merz's ambitious plans to reform the economy. Since taking office in May after forming a coalition with a slim parliamentary majority between his centre-right Christian Democratic Union or CDU and the centre-left Social Democratic Party or SPD, Merz's government has reformed the constitutionally mandated limits on government deficits and has committed to significant increases in defence expenditure and infrastructure, especially of transport.

The ECB, presumably supported by the European Commission, continues to focus on inflation, even though its President is delighted to tell anyone who will listen that inflation has been defeated.

Philip Land, the Central Bank’s centrist Chief Economist, told reporters recently that he is not concerned about the current level of growth, which is anaemic at best. However, he declined to speculate when the measures that have been put in place will begin to bear fruit.

The common currency “gave back” all the gains it had made over the past five sessions, falling to a low of 1.1577 and closing at 1.1601. This confirms that there is no substantial interest in the currency, which remains subject to speculative flows.

Have a great day!