Bank of England and Federal Reserve make interest rate decisions

Spotlight: Diversity, Equality and Inclusion in Investment Management

Diversity, Equity and Inclusion (DEI) within an organisation defined:

• Diversity: Actively seeking a variety of perspectives from individuals across all levels of the organisation, from the boardroom to entry level colleagues. This includes people with different genders, races, ethnicities, sexual orientations, and life experiences.

• Equity: Ensuring that everyone receives fair treatment and has equal opportunities.

• Inclusion: Creating an environment where all individuals feel encouraged to speak freely and actively participate in discussions.

Why does DEI matter?

We invest some of our clients’ money using external organisations (asset managers). We want asset managers to be making the best investment decisions and this is particularly important for those managers who are looking to beat the market. Research by WTW conducted in 2023 assessing over 1,500 investment strategies, has found that asset managers with a more diverse workforce tend to outperform their less diverse peers. Though correlation does not imply causation, DEI could be an extra input to consider when deciding how a portfolio should be designed alongside looking at more traditional metrics like expected return and risk. WTW say that diversity in the asset management industry is on the right track, but at the wrong pace pointing to slow progress in improving diversity within these organisations. This is despite increases in data transparency and the implementation of DEI policies in recent years.

The Noise

• UK inflation held steady in August, with consumer price inflation of 2.2% unchanged from July and in-line with consensus expectations. Services inflation, a data point closely watched by the Bank of England sped up in August, rising to 5.6% from 5.2% in July. One factor behind the rise was a 22.2% jump in air fares between July and August. Air fares typically rise during this part of the year, but the Office for National Statistics data shows this was the second largest jump since records began in 2001. Sterling strengthened against the dollar following the data release as investors trimmed bets on a BoE rate cut. Core inflation, which excludes volatile goods and services such as energy and food accelerated on a monthly and yearly basis to 0.4% and 3.6% respectively. This can help explain why the BoE is likely to take a more cautious approach than the US Federal Reserve in its easing cycle over the next few months.

• The Bank of England kept interest rates at 5.0% this week, in a widely expected move that saw the Monetary Policy Committee vote 8-1 in favour of no change, with one vote for a cut. BoE Governor Andrew Bailey emphasised that they would continue to adopt a cautious approach, saying “it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much”. The vote shows that despite recent data indicating slower-than-expected inflation and economic growth, officials are yet to be convinced that the threat from consumer price growth has been sufficiently thwarted. With the Federal Reserve deciding to cut rates the day prior, the BoE’s decision helped push the pound to its strongest level against the dollar since March 2022. Looking ahead, markets are fully expecting a rate cut at the next MPC meeting in November, which given current guidance may be less likely than markets think at present.

• The World Bank delivered a record $42.6 billion in climate finance during its 2024 fiscal year, a 10% increase over the $38.6 billion the prior year. The data shows strong progress towards the bank’s sustainability goals but falls well short of the trillions of dollars in additional resources needed annually to finance the clean energy transition in emerging and developing countries. A UN-backed initiative called the Industrial Transition Accelerator published data this week showing high-emitting industries are still struggling to finance its green transition. More than 450 large scale low-carbon projects are seeing demand for green products still too weak for them to justify investment. Removing the “critical investment barrier” caused by low demand could unlock $700 billion in financing by 2030 and help decarbonise a wealth of industries. Pressure is now on governments and NGOs to improve conditions to help improve demand for low-carbon projects and ensure investment cases remain robust.

The Numbers

The Nuance

The US Federal Reserve has finally moved, launching the unwind of its historic monetary tightening campaign with a larger-than-expected half percentage point reduction. Forecasters were largely anticipating a 0.25% cut, with JP Morgan Chase the only bulge bracket Wall Street bank expecting a 0.50% cut. This outsized interest rate cut designed to preserve the strength of the US economy will take interest rates from a 5.25% - 5.50% range down to 4.75% - 5.00%.

Speaking on the decision, Federal Reserve Chair Jerome Powell cited that the logic to cut rates from both “an economic standpoint and from a risk management standpoint was clear”. He called the move a “recalibration” to account for the sharp decline in inflation since last year. He also noted the economy remained strong, but the central bank was eager to stay ahead of and stave off any weakening in the job market.

Looking ahead, financial markets are now pricing in the central bank to keep lowering rates to around 4.00% - 4.25% by the end of the year, with more cuts to follow in 2025. Despite the bigger than expected jump to start cutting rates, Fed Chair Powell was careful to avoid committing to a similar pace going forward, with any future moves data dependent. Fed policymakers have said though that they don’t see interest rates returning to the ultra-low levels seen through the 2010s, and that they’d likely land north of 2%. A soft landing is within reach for Jerome Powell, which would seal his legacy as Federal Reserve Chairman.