While US President Donald Trump has been on a state visit to the UK this week for meetings with King Charles and Prime Minister Keir Starmer, the focus for financial markets has been on central bank policy. The Federal Reserve delivered its first interest rate cut of 2025, while the Bank of England (BoE) opted to hold rates steady at 4%. Together, the moves underscore a growing divergence in the pace of policy easing on either side of the Atlantic.

Fed makes its first move of 2025

The Federal Open Market Committee (FOMC) voted to cut the target range for the federal funds rate by 25 basis points (bps) to 4-4.25%. It marked the first reduction this year after a prolonged period of restrictive policy aimed at cooling inflation.

Officials pointed to softer economic activity in the first half of 2025, a slowdown in hiring, and signs of rising slack in the labour market. Inflation has edged higher in recent months, but policymakers judged that downside risks to employment now outweigh the risks of inflation persistence.

“The balance of risks has shifted,” said Fed Chair Jerome Powell. He told reporters that while inflation had been the dominant concern until recently, the picture now looks different. Weak hiring figures have amplified concerns, with just 22,000 jobs added in August and earlier months revised sharply lower.

Powell also highlighted the impact of immigration on labour supply, noting that both supply and demand in the jobs market had “come down quite sharply”.

The rate decision was not unanimous. New Trump appointee to the FOMC, Stephen Miran, dissented, voting instead for a larger 50 bps cut. His stance reflected concerns that a modest move may not be sufficient to support growth and stabilise employment.

Despite the cut, the Fed reaffirmed its commitment to bringing inflation back to its 2% target. Officials signalled that further adjustments would depend on how incoming data shape the outlook. The central bank also confirmed that it will continue reducing its balance sheet through asset sales, maintaining a tightening bias on liquidity even as rates move lower.

Markets interpreted the decision as a tentative pivot towards easing, but not a rush to stimulus. Futures pricing suggests expectations for at least one more cut this year, though much will depend on inflation dynamics heading into the final quarter.

BoE sticks at 4%

Across the pond, the BoE’s Monetary Policy Committee (MPC) voted seven to two in favour of holding Bank Rate at 4%. Two members argued for a 25 bps cut to 3.75%, citing signs of continued disinflation, subdued consumer spending and weaker global demand.

The majority, however, judged that it was too soon to loosen policy further. While UK inflation has fallen sharply from its post-pandemic highs, the August reading of 3.8% was still well above the 2% target. The MPC expects inflation to tick higher in September before resuming its downward path.

Committee members highlighted persistent risks in wage and price-setting behaviour, despite some easing in pay growth. Services inflation remains sticky, a factor that has weighed heavily in past decisions. Policymakers argued that maintaining current rates would help anchor expectations and guard against renewed price pressures.

The debate within the MPC reflects the fine balance the BoE is trying to strike. On one side, there is a need to support a sluggish economy, with GDP growth remaining weak and signs of slack emerging in the labour market. On the other, there is caution that cutting too quickly could reignite inflation at a time when price stability is not yet secured.

Daniel Austin, chief executive and co-founder at ASK Partners, said: “Today’s unchanged UK inflation points to a bumpy and uncertain road ahead. Policymakers are caught between volatile global conditions, exacerbated by ongoing uncertainty, and shifting domestic policy. Markets still expect another rate cut before year-end, but with the Autumn Budget looming, the MPC is likely to hold fire until there’s clarity on the Chancellor’s fiscal plans. A premature move would be a leap of faith.”

Diverging paths

The contrast between the Fed and the BoE reflects different stages of the inflation cycle and labour market conditions. In the US, inflation remains above target but appears less threatening than the rapid cooling in employment. In the UK, inflationary pressures are still considered prominent, particularly in services, leaving policymakers wary of declaring victory too soon.

Both central banks stress that monetary policy is not on a pre-set path. Officials on both sides have emphasised the need for flexibility, with decisions to be guided by data on inflation, wages, growth and global conditions.

For corporates and financial markets, the divergence could mean greater volatility in exchange rates and borrowing costs. A weaker dollar, should US rates fall further, may complicate hedging strategies for treasurers with US exposure. In the UK, higher-for-longer rates may tighten financing conditions for businesses already grappling with subdued demand.

What comes next

Attention now turns to the pace of further easing. In the US, Powell’s comments suggest the Fed is prepared to cut again if labour market weakness deepens. The dissenting vote for a larger reduction underscores that debate over the scale of support is intensifying.

In the UK, markets are watching closely for signs of another cut before the end of the year. Much will hinge on the trajectory of inflation and the fiscal stance set out in the Autumn Budget. Any indication of looser fiscal policy could reduce the urgency for monetary easing, while a more austere approach may increase pressure on the MPC to act sooner.

Both central banks face heightened uncertainty, with global risks from geopolitics to commodity prices threatening to disrupt fragile disinflation trends. While their decisions this week point in different directions, the common thread is caution: neither institution is prepared to commit to a fixed policy path.