The U.S. Federal Reserve, European Central Bank (ECB) and Bank of Japan (BoJ) all did what was expected last week and held interest rates steady, choosing to wait until their December meetings before potentially hiking again.
Markets had been pricing the holds, but persistent inflation and continued strong economic growth made that decision harder to justify, and the Fed itself saw two dissents in favor of a quarter-point rise. Last week’s elevated U.S. Personal Consumption Expenditures print followed recent hot Consumer Price and Producer Price Index data, an inflationary trend that extends across the other economies and the U.K.
Indeed, the Bank of England (BoE), which meets Thursday, is expected to hike for the first time since August 2023.
As we outlined recently in our Fixed Income Outlook 4Q 2026, we see these four central banks heading into a broadly synchronized but relatively short tightening cycle to contain inflation, with local macro and political dynamics shaping the timing and extent of each move.
The Fed’s Dovish Hold
With the midterms this week, the political backdrop favored a hold even as inflation rises, increasing the importance of Chair Warsh’s press conference as the market sought guidance on the pace and timing of policy adjustments. Going into the meeting, the market had priced a quarterly path of hikes through June 2027.
In our view, the tone of the conference was starkly different from September’s. Warsh’s comments overall were moderately dovish, underscored by his consistent pointing to the committee’s data-dependent lean and its willingness to accumulate more data before further policy adjustments. He also highlighted the tightening of financial conditions since the September hike, which he said he wants to see play out between now and December.
In response, the market modestly reduced pricing of an aggressive hiking cycle, pushing rates higher at the long end of the curve and lower at the short end.
Our base case remains that the Fed will hike by 25 basis points in December before a potentially lengthy pause, with the neutral rate settling around 4.00 – 4.25%. However, there is a tail risk of more hikes if energy prices remain elevated or there is a feed-through to core inflation.
ECB and BoJ Eye December Hikes
Energy and core pass-through matter well beyond the U.S., and the Fed’s patience is a luxury that, in our view, the ECB and BoJ can afford less. Both are contending with rising inflation, and both held rates last week, strengthening market expectations of December hikes.
In Japan, underlying inflation has risen steadily this year and has now broadly reached the BoJ’s long-held 2% target, supporting the case for further hikes. We expect 25 basis points in December, with another potentially in the second quarter of next year.
The ECB’s calculation is more complex. It must contend not only with high and rising energy costs—European gas prices jumped above €100 a megawatt hour last week for the first time in four years, on the threat of a re-escalation in the Iran conflict—but also with volatility in the French government bond market and a succession race for the presidency of the bank.
ECB President Christine Lagarde announced ahead of the meeting that she will step down in February next year, setting up a leadership contest that may inject greater uncertainty into the policy path.
In its statement, the ECB cited stable underlying inflation and wage growth, together with tightening financial conditions, as reasons for holding. It also said for the first time that higher energy prices for longer would weigh on growth, which gave the statement a broadly dovish tone.
We still think a December hike is likely if gas prices stay above the €77 level in the ECB’s “adverse scenario,” and we anticipate a pause next year as the focus shifts from inflation to growth.
How We See Positioning
Taken together, we expect U.S. interest rates to be range-bound around current levels, with a bias to shift lower on any sign of risk-off. The market continues to price more hikes than the Fed has projected, which is why we hold a long-duration bias in the U.S. That bias also fits the tail risk we see in credit, since a policy-induced slowdown would tend to pull yields down.
In Europe, we have moved slightly longer, concentrating in the five- to 10-year part of the curve. In particular, we have returned our positioning in France to neutral, viewing the sell-off as largely overdone, and see convergence opportunities in Italy and Greece at five to seven years and in Central and Eastern Europe.
Hikes are coming, but with much of the tightening already priced and financial conditions doing part of the central banks’ work, a key question is how growth and credit absorb it. We are positioned accordingly, holding duration where we believe yields can fall and staying selective where spreads have widened.
What to Watch For
Monday 11/02:
- U.S.: Manufacturing Purchasing Managers’ Index
- U.S.: ISM Manufacturing Prices
- Eurozone: Manufacturing Purchasing Managers’ Index
- Australia: RBA Interest rate Decision
Tuesday 11/03:
- U.S.: JOLTS Job Openings
Wednesday 11/04:
- U.S.: ADP Nonfarm Employment Change
- U.S.: Services Purchasing Managers’ Index
- U.S.: ISM Non-Manufacturing Purchasing Managers’ Index
- U.S.: Crude Oil Inventories
- Eurozone: Consumer Price Index
Thursday 11/05:
- U.S.: Initial Jobless Claims
- U.K.: BoE Interest Rate Decision
Friday 11/06:
- U.S.: Nonfarm Payrolls
- U.S.: Unemployment Rate
- U.S.: Average Hourly Earnings
