Weekly Market Update - 23 September 2025

The US central bank, known as the Fed, lowered its key lending rate by 0.25%, a move often referred to as dovish. Widely anticipated by investors, it was the first adjustment to US interest rates since December 2024. Helped by expectations of two further rate cuts this year, the US equity market index, the S&P 500 as well as the technology focused Nasdaq Composite index both ended the week at all-time highs.

The Fed has two responsibilities: to maintain price stability (i.e. target an inflation rate of 2%), while also, unusually, ensuring maximum employment. In contrast with this mandate balancing act, many other major central banks, including the Bank of England (BoE), only need to concentrate on the core goal of price stability, which primarily involves managing inflation.

The Fed’s dual focus can prove difficult when it only has one tool, interest rates, to control both. The result is the Fed often needs to prioritise either employment or inflation. Currently, the Fed finds itself in a situation where job growth is slowing while inflation remains above its 2% target, and higher than it was a year ago.

The Fed called its rate decision a ‘risk-management cut’. Investors interpret this as meaning support for the jobs market is now the priority, even if inflation remains high. Fed chair Jerome Powell has highlighted the two key negatives for US employment were tariffs and the immigration crackdown. The recent downward revision to the annual job creation numbers, as well as ongoing employment data below analysts’ expectations, featured in the central bank’s calculations to cut interest rates.

Greg Venizelos, SJP’s fixed income strategist highlighted the risk-management aspect of the Fed’s interest rate cut. “Post Covid, the Fed was late to raise interest rates. Remember when they described inflation as being ‘transitory’ during the pandemic? What we are seeing now is the US central bank being more proactive regarding possible problems in its jobs market. Even so, they are cutting rates as economic growth forecasts for the global (and US) economies are being raised. US equity valuations have also been increasing”.

There are fears any slowdown in the US jobs market risks affecting consumer confidence and consumption, which is seen as dangerous for the broader economy. The Fed’s conundrum is that cutting rates now could support the jobs market but it could also potentially harm its reputation if the job market doesn’t improve and inflation remains high.

Bank of England holds back

In contrast the BoE decided to hold rates last week. It’s decision not to move was that at 3.8%, UK inflation is stubbornly above the UK central bank’s 2% target. Certain sectors such as food and the housing rental market are major culprits here, as well as wage growth. Yet the BoE retained its guidance on future rate cuts as ‘gradual and careful’. In contrast with the Fed, it has already cut interest rates four times since last November. Despite domestic inflation above target, the slow-down in the domestic jobs market is a major concern, with risks that as in the US, it will continue to weaken.

The BoE also took the decision to reduce its rate of its bond (also known as gilt) sales from £100 billion annually to £70 billion. Known as quantitative tightening (QT), this process is the opposite of quantitative easing (QE). A slowdown in the rate of gilt sales is expected to provide a number of benefits, chief among them being to support gilt prices. Because gilt prices and gilt yields move in opposite directions, many analysts see this helping ease some of the upward pressure on bond yields and the cost of servicing the government’s debt.

Markets round-up

The US smaller companies Russell 2000 index joined the Dow Jones, S&P 500 and Nasdaq 100 indices in reaching a record high during the week following the Fed’s interest rate cut. Many other assets also rose, including gold, silver and the US dollar. US 10-year bond yields inched higher (while prices fell) and the oil price also ended lower. Positive AI-related news flow continued to dominate the headlines, with US mega-cap technology shares outperforming the broader S&P 500.

Across Europe, sentiment was more mixed. The MSCI Europe ex-UK benchmark ended slightly higher, but the UK’s FTSE 100 slipped, as did a number of other European markets. The pound slipped against the US dollar.

Elsewhere, Asian emerging markets rallied, although mainland Chinese shares closed lower in response to weak data on retail sales and industrial output. Japanese markets also ended in the red.