SEI’s view

As expected, the Federal Reserve (Fed) held the federal funds rate steady at its meeting in late October while highlighting the strength of the U.S. economy and persistent above-target inflation. Fed Chair Kevin Warsh also noted that financial conditions have tightened but stopped short of characterizing them as tight. More notable was a procedural change introducing a dedicated monetary policy strategy meeting without a vote on the federal funds rate or an accompanying policy statement. The move marks another incremental shift by Warsh away from the framework that took shape under former Fed Chair Ben Bernanke in the aftermath of the global financial crisis of the late 2000s. The European Central Bank (ECB) also held rates steady following its previous hike, although President Christine Lagarde’s announcement that she will step down in February 2027, dominated attention. Speculation around her successor is already building, with Klaas Knot, a former member of the ECB Governing Council, and Pablo Hernández de Cos, a former governor of the Bank of Spain, viewed as leading candidates. Elsewhere, the Bank of England (BOE) and the Bank of Canada (BOC) both raised their benchmark interest rates for the first time since 2023, as inflation pressures intensified. The BOE also raised its inflation forecast, with the consumer-price index (CPI) now expected to approach 5% in 2027. Despite the recent rally in U.S. Treasury yields, SEI continues to expect that yields will move higher, with technical positioning likely to amplify volatility and produce larger market moves as yields trend upward. Outside the U.S., risks appear more two-sided, as the ECB, BOE, and BOC navigate soft-to-moderate economic growth alongside above-target inflation, potentially leaving less room for monetary policy adjustment.

Federal Reserve (Fed)

• In a split 10-2 vote at its October 27-28 meeting, the Federal Open Market Committee (FOMC) maintained the federal funds rate in a range of 3.75% to 4.00% but signaled that future rate hikes are not off the table. Two Committee members favored a 25-basis-point (0.25%) increase.
• In its statement announcing the policy decision, the FOMC expressed its view that the U.S. economy is “expanding at a strong pace,” an upgrade from its characterization of the economy as “solid” in its September statement. The FOMC also noted, “Inflation remains elevated. The accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s two percent goal.”

• During a news conference following the FOMC meeting, Fed Chair Kevin Warsh said keeping interest rates steady was “the right decision for this moment.” Warsh reiterated the central bank’s commitment to fight inflation. “There’s no soft inflation target,” he commented. “Quashing inflation is not about some fixed individual date on a calendar, the same way it's not about some isolated data point. I’m encouraged by the progress we’ve made in a short period of time.”

   

European Central Bank (ECB)

• The ECB voted unanimously to keep its benchmark interest rate unchanged at 2.50% during its October 28-29 meeting but left open the possibility of future rate hikes due to sticky inflation.
• In a news release, the ECB’s Governing Council commented, “The increased magnitude and duration of the energy shock, as well as the implications for indirect and second-round effects, are likely to drive up inflation and lower growth…The Governing Council is committed to setting monetary policy to ensure that inflation stabilises at its 2% target in the medium term.” The Governing Council also noted that it is not pre-committing to a particular rate path.
• Shortly before the release of its policy decision, the central bank announced that ECB President Christine Lagarde will step down from her position, effective February 7, 2027―eight months before the end of her term. In a video posted online, Lagarde, who has served as ECB president since 2019, said, “It has been a great pride and a huge privilege to serve this institution. I leave this institution with a sense of good work done.”

Bank of England (BOE)

• At its meeting on November 5, the BOE voted by a margin of 8-1 to raise the Bank Rate by 0.25% to 4.00%―the first rate hike since August 2023―citing the continued impact of the Middle East war on energy prices. Monetary Policy Committee (MPC) member Catherine L. Mann favored a 0.50% rate increase.
• The MPC stated, “The conflict in the Middle East is now in its ninth month. Global energy prices have continued to rise from an already elevated level. UK CPI inflation increased to 3.5% in September. It is now expected to rise to around 5% by the middle of next year. It is then projected to fall as the impact of rising energy prices on 12-month inflation rates fades, and still restrictive monetary policy bears down on inflation.”
• The central bank’s announcement provided insights into the views of the MPC members. BOE Governor Andrew Bailey discussed the possibility of future rate hikes. “Without news which softens the risks to inflationary pressures, I can see the argument for a further increase in rates and thereafter taking a more conditional approach, dependent on the evidence on energy prices and inflation dynamics.”

Bank of Japan (BOJ)

• At its meeting on October 29-30, the BOJ’s Policy Board voted by an 8-1 majority to maintain its benchmark interest rate at a 31-year high of 1.25%. Board member Takata Hajime voted for a 0.25% rate increase to 1.50%.
• In a statement announcing the rate decision, the central bank commented that inflation has reached its 2% target rate. “With a sense of labor shortage continuing to be strong, the mechanism in which wages and prices rise moderately in interaction with each other has been operating, and medium- to long-term inflation expectations are at around 2 percent.”
• During a news conference following the meeting, BOJ Governor Kazuo Ueda said, ”Underlying inflation has reached levels consistent with our price target. Financial conditions remain accommodative. There are various upside risks. We must therefore be vigilant to the risk of inflation overshooting our target.”

Bank of Canada (BC)

• The BOC raised its policy rate by 0.25% to 2.50% at its October 28 meeting and indicated that additional rate hikes may be needed to combat sticky inflation.
• In a statement announcing the monetary policy decision, the central bank noted that the ongoing Middle East war continues to push energy prices higher. “The conflict in the Middle East is now in its eighth month and there is no clear path to resolution. The combination of higher-for-longer energy prices and increased pass-through adds to the persistence of inflation in the projection,” the BOC commented. “CPI inflation is expected to average 3% in 2027, a percentage point above the July projection, then come down to 2% in the middle of 2028. The main sources of uncertainty around this forecast are developments in the Middle East and businesses’ responses to cost pressures.”

• At a news conference following the interest-rate announcement, BOC Governor Tiff Macklem said, “With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation. There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully.”

  

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