The US central bank has announced an interest rate cut, just hours before the Bank of England is tipped to refrain from following suit.
The Federal Reserve cut its main funding rate by a quarter point to a new target range of 4.25%-4.5%, as markets had expected, but signalled that future reductions would happen more slowly.
A resurgence in the pace of inflation is a big worry, with the prospect of new trade tariffs under Donald Trump from 20 January also risking a leap in the pace of US price growth in the New Year as imported goods would cost more.
Data on Tuesday showed resilient consumer spending among other reasons for Fed policymakers to be wary of inflation ahead.
The Federal Open Markets Committee expected two rate cuts in 2025. Market expectations had been for four just weeks ago, in line with the Fed’s September guidance.
Fed chair Jay Powell told reporters solid growth, improved employment and progress in the battle against inflation meant the central bank was in a “good place”.
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But he acknowledged that “policy uncertainty” relating to the incoming Trump administration was a concern for the inflation outlook among some of the committee’s membership.
Image: Fed chair Jay Powell is seen taking reporters’ questions File pic: Federal Reserve
“We just don’t know very much at all about the actual policies, so it’s very premature to try and make any conclusion”, he added.
Government bond yields, which reflect perceived future interest rate paths, ticked upwards.
The dollar found support, gaining 0.5% against both the pound and euro, while major US stock markets retreated.
The Fed’s rate decision was announced just hours before the Bank of England gives its own rate verdict.
No cut is expected while financial markets are expecting a similar message on the possible interest rate path ahead.
UK yields – the effective cost of servicing government debt – have moved sharply higher this month, with the gap between British and German 10-year bond yields rising to its highest level in 34 years earlier on Wednesday.
It reflects the diverging interest rate outlooks for the Bank of England and European Central Bank, which has been cutting rates consistently to boost the euro area’s economy.
The UK’s problem is that the paces for both wage and price growth have accelerated.
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2:38
Businesses react to shrinking economy
The scenario presents the Bank with a particular challenge.
Its governor Andrew Bailey has admitted that the budget’s effect on businesses is casting the biggest question mark over the future rate path.
Worries include the extent to which firms seek to recover costs from tax hikes and minimum pay rises in the form of price rises.
On the other hand, the pressure on wage growth could be eased if firms carry out their threat to limit pay growth as a result of the budget burden.
As it stands, UK borrowing costs look set to be higher for longer, hampering the economy as they are designed to do but also driving up the government’s bill to service its debts.
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1:37
Chancellor reacts to inflation rise
While the Bank is widely expected to hold off on a cut on Thursday, financial market forecasts for a reduction in February, seen as nailed on just weeks ago, are now running at just 50% in the wake of the latest wage and inflation data.
Just two rate cuts are priced in for 2025 currently.
What the Bank has to say about the price pressures it is currently seeing will be closely scrutinised.
Commenting on the US outlook Matthew Morgan, head of fixed income at Jupiter Asset Management, said: “As it stands, the market expects only two further cuts in the whole of 2025. This is perhaps not surprising given consumer spending, policy uncertainty (particularly around tariffs) and jobs looking in decent health.
“However, we think we are likely to see [US] rate cut expectations increase next year as growth softens. The labour market is clearly cooling, inflation is softening, and Europe and China are a drag on global growth.
“Given the high inflation of the Biden presidency was very unpopular with the public, we think Trump will be wary of overdoing inflationary policies, like tariffs. Together with potential government spending cuts in the US, next year could well see positive conditions for the performance of government bonds.”
Tesla’s board has signed off a $29bn (£21.8bn) share award to Elon Musk after a court blocked an earlier package worth almost double that sum.
The new award, which amounts to 96 million new shares, is not just about keeping the electric vehicle (EV) firm’s founder in the driving seat as chief executive.
The new stock will also bolster his voting power from a current level of 13%.
He and other shareholders have long argued that boosting his interest in the company is key to maintaining his focus after a foray into the trappings of political power at Donald Trump‘s side – a relationship that has now turned sour.
Musk is angry at the president’s tax cut and spending plans, known as the big beautiful bill. Tesla has also suffered a sales backlash as a result of Musk’s past association with Mr Trump and role in cutting federal government spending.
Image: Tesla’s Elon Musk is seen on stage during an event in Shanghai Pic: Reuters
The company is currently focused on the roll out of a new cheaper model in a bid to boost flagging sales and challenge steep competition, particularly from China.
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The headwinds have been made stronger as the Trump administration has cut support for EVs, with Musk admitting last month that it could lead to a “few rough quarters” for the company.
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Could Trump cost Tesla billions?
Tesla is currently running trials of its self-driving software and revenues are not set to reflect the anticipated rollout until late next year.
Musk had been in line for a share award worth over $50bn back in 2018 – the biggest compensation package ever seen globally.
But the board’s decision was voided by a judge in Delaware following a protracted legal fight. There is still a continuing appeal process.
Earlier this year, Tesla said its board had formed a special committee to consider some compensation matters involving Musk, without disclosing details.
The special committee said in the filing on Monday: “While we recognize Elon’s business ventures, interests and other potential demands on his time and attention are extensive and wide-ranging… we are confident that this award will incentivize Elon to remain at Tesla”.
It added that if the Delaware courts fully reinstate the 2018 “performance award”, the new interim grant would either be forfeited or offset to ensure no “double dip”.
The new compensation package is subject to shareholder approval.
Banks will still most likely have to fork out over discretionary commissions – a type of commission for dealers that was linked to how high an interest rate they could get from customers.
The FCA, which banned the practice in 2021, is currently consulting on a redress scheme but the final bill is unlikely to exceed £18bn. Overall, the result has been better than expected for the banks.
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1:12
Car finance ruling explained
Lloyds, which owns the country’s largest car finance provider Black Horse, had set aside £1.2bn to cover compensation payouts.
Following the judgment, the bank said it “currently believes that if there is any change to the provision, it is unlikely to be material in the context of the group”.
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0:58
‘Don’t use a claims management firm’
The judgment released some of the anxiety that has been weighing over the Bank’s share price.
Jonathan Pierce, banking analyst at Jefferies, said the FCA’s prediction was “consistent with our estimates, and most importantly, we think it largely de-risks Lloyds’ shares from the ‘motor issue'”.
Bank stocks have responded robustly to each twist and turn in this tale, sinking after the Court of Appeal turned against them and jumping (as much as 8% in the case of Close Brothers) when the Supreme Court allowed the appeal hearing.
Concerns about this volatility motivated the Supreme Court to deliver its judgment late in the afternoon so that traders would have time to absorb the news.
Thousands of motorists who bought cars on finance before 2021 could be set for payouts as the Financial Conduct Authority (FCA) has said it will consult on a compensation scheme.
In a statement released on Sunday, the FCA said its review of the past use of motor finance “has shown that many firms were not complying with the law or our disclosure rules that were in force when they sold loans to consumers”.
“Where consumers have lost out, they should be appropriately compensated in an orderly, consistent and efficient way,” the statement continued.
The FCA said it estimates the cost of any scheme, including compensation and administrative costs, to be no lower than £9bn – adding that a total cost of £13.5bn is “more plausible”.
It is unclear how many people could be eligible for a pay-out. The authority estimates most individuals will probably receive less than £950 in compensation.
The consultation will be published by early October and any scheme will be finalised in time for people to start receiving compensation next year.
What motorists should do next
The FCA says you may be affected if you bought a car under a finance scheme, including hire purchase agreements, before 28 January 2021.
Anyone who has already complained does not need to do anything.
The authority added: “Consumers concerned that they were not told about commission, and who think they may have paid too much for the finance, should complain now.”
Its website advises drivers to complain to their finance provider first.
If you’re unhappy with the response, you can then contact the Financial Ombudsman.
The FCA has said any compensation scheme will be easy to participate in, without drivers needing to use a claims management company or law firm.
It has warned motorists that doing so could end up costing you 30% of any compensation in fees.
The announcement comes after the Supreme Court ruled on a separate, but similar, case on Friday.
The court overturned a ruling that would have meant millions of motorists could have been due compensation over “secret” commission payments made to car dealers as part of finance arrangements.
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2:34
Car finance scandal explained
The FCA’s case concerns discretionary commission arrangements (DCAs) – a practice banned in 2021.
Under these arrangements, brokers and dealers increased the amount of interest they earned without telling buyers and received more commission for it. This is said to have then incentivised sellers to maximise interest rates.
In light of the Supreme Court’s judgment, any compensation scheme could also cover non-discretionary commission arrangements, the FCA has said. These arrangements are ones where the buyer’s interest rate did not impact the dealer’s commission.
This is because part of the court’s ruling “makes clear that non-disclosure of other facts relating to the commission can make the relationship [between a salesperson and buyer] unfair,” it said.
It was previously estimated that about 40% of car finance deals included DCAs while 99% involved a commission payment to a broker.
Nikhil Rathi, chief executive of the FCA, said: “It is clear that some firms have broken the law and our rules. It’s fair for their customers to be compensated.
“We also want to ensure that the market, relied on by millions each year, can continue to work well and consumers can get a fair deal.”