Fed under pressure to go big
FINALLY, the moment is here. After endless debate on American financial media, the Federal Reserve – the US central bank – is set to cut interest rates today for the first time in four years.
The decision will be watched across the globe but nowhere more closely than at the Bank of England, which will make a decision on bank rate tomorrow having reduced it by a quarter of a percentage point to 5pc last month.
A reduction in US borrowing costs is regarded as nailed on. Pessimists on US economic prospects fear recession as the jobs market weakens, and are urging the Fed to go bold with a full half-a-percentage cut in the 5.25pc to 5.50 current range.
They note that on the way up, when the US central bank was combating inflation, it moved boldly with a half-point and even three-quarter point jump. On the way down, Fed chairman Jay Powell needs to be courageous again.
Headline inflation has moved close to the Fed’s goal of 2pc. At the same time, US unemployment has edged up to 4.2pc of the workforce from 3.7pc at the start of the year. Gains in monthly jobs added have tumbled. The dilemma for the decision makers on the interest rate setting Open Markets Committee is whether easing too quickly could risk progress made on inflation. The discussion has focused on whether it will go for a full half-point cut.
Rate setters who were criticised for being slow when inflation unfurled after the pandemic may regret not going further now should the economy weaken between now and November’s election. The politics are delicate. Donald Trump is a vocal opponent of Powell and has threatened to sack him if he doesn’t get behind rate cuts.
The markets believe that there is a 59pc chance of the central bank going big with the full half-point. If that is the case, then it could influence the Bank of England’s decision makers. All the signals have been ‘no change’ following the earlier reduction and there has been unanimity among leading economists. Decision makers might also be mindful that economic confidence has ebbed since Labour discovered an alleged black hole in the budget.
A decisive American cut might create room for a late change of heart at the Bank of England.
Trade route
IT IS NO secret that Britain’s high streets are in difficulty. So it is encouraging to learn that Thierry Garnier, chief executive of home improvement group Kingfisher, who pioneered fast turnarounds for click and collect and deliveries at B&Q and Screwfix, is investing in smaller High Street outlets in the UK and Europe.
Screwfix has moved seamlessly from its origins of catalogue sales to trade warehouses to retail outlets including a recent opening on my own street in south-west London. It makes a change from the proliferation of coffee shops and barbers.
The strategy was unveiled with an unexpected upgrade for the full year with the profits range lifted to £510m to £550m.
This was enough to propel the shares up by 11.2pc in latest trading and 31pc so far this year. French offshoot Castorama continues to be a drag but for the moment remains core, as new formats are tried in an effort to turn matters around amid a sluggish economic backdrop.
Plans are for trade-focused Screwfix to have 20 smallish city stores this year and up to 100 in the coming period. It is following a localism pattern pioneered by Tesco and the other grocers.
Smart thinking.
Taking AIM
IF RACHEL Reeves were to call a halt to the inheritance and/or capital gains reliefs for investing in AIM shares she would have to sacrifice her growth agenda.
Research for the London Stock Exchange by audit firm Grant Thornton shows that the value to the economy of firms listed on AIM is £68bn and they account for 778,000 jobs.
These are far more productive than the national average and a big contributor to easing regional disparities.
Labour is committed to unleashing growth through its newly created National Wealth Fund and pension fund reforms. AIM is already on the case by raising longterm capital for innovation and enterprise.
The Government needs to be careful for what it wishes for.