US Interest Rates unchanged for sixth consecutive meeting following months of strong economic data

Spotlight: Income vs Wealth

The idea of accumulated advantage is sometimes called the ‘Matthew Effect’, from this verse in the Gospel of Matthew: “For to everyone who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away”. This explains the idea that initial advantage (e.g. wealth or education) tend to lead to further advantages over time (e.g. more wealth or better jobs), and conversely disadvantages can compound over time, creating a repetitive cycle of inequality. In other words: "the rich get richer and the poor get poorer."

Economic inequality can be assessed either by income inequality (looking at people’s income from things like salaries or investment income) or wealth inequality (looking at how much people own in things like property or savings). The charts below show a comparison of the top 10% of the population’s income/wealth relative to the bottom 50% of the population’s income/wealth in the UK. This highlights that wealth inequality is more pronounced than income inequality, reflecting just how difficult it is for half of the population to build up meaningful wealth, after covering the cost of living.

People who are fortunate enough can of course set up their family for future financial success via a direct transfer of their wealth i.e. clearing student debts, helping with a property, and (eventually) inheritance. But the greater advantages are arguably by providing things like:
- A safe neighbourhood, access to healthy food, space for exercise, less exposure to outside stress
- Good schools, confidence-boosting hobbies, extensive travel, experience of art and culture
- Ample family time, exposure to successful adults and the way they think, speak and behave

These things (all costing money in one way or another) can help to develop the vital skills such as how to present oneself, build relationships or overcome challenges which are all needed for career success. The challenge is determining what it would take to move from the lowest decile in terms of income / wealth to the top decile. WTW research observes that public- and private-sector leaders are increasingly integrating equity (the concept of correcting disparities or imbalances to achieve equality of outcomes, rather than simply treating everyone the same) into their policy and growth strategies. However, these would need to be significant to offset the Matthew Effect.

The Noise​

• Eurozone inflation steadied at 2.4% in the 12 months to the end of April, the same as in March. Crucially, core inflation, which excludes volatile goods and services such as food and energy, slowed to 2.7% from 2.9% and services inflation eased to 3.7% after being stuck at 4% since the start of the year. This solidifies an already strong case for the European Central Bank to cut interest rates in June. It will also give comfort to the ECB who have all but promised a rate cut at their next meeting on June 6th. But unexpectedly high inflation readings in the US may be a concern for the months ahead. Though the ECB insists it is independent, the US Federal Reserve still exerts significant influence on global markets. Europe being a couple steps ahead of the US in cutting rates could weaken the euro and push up imported inflation, though ECB policymakers argue it shouldn’t be an issue.

• The eurozone economy rebounded in the first quarter from a mild recession, as Germany returned to growth and expansion accelerated elsewhere. GDP in the 20-country currency bloc increased by 0.3% quarter-on-quarter in the first three months of 2024 per official data. Germany, the eurozone’s largest economy grew a bigger than expected 0.2% from the previous quarter, benefitting from improved exports and construction investment. The worst seems behind it for Germany, as rising trade and lower inflation would likely lead to moderate growth over the coming quarters. The French economy also gained momentum through January and March thanks to a pick-up in consumer spending and business investment.

• London’s High Court ruled this week that Britain’s most recent climate action plan is unlawful because ministers were not told of the risk that key policies could not be delivered. This poses another hurdle for the nation in its journey towards achieving net zero emissions. The Court's decision was that the carbon budgets established by the government in 2023 to reach the UK’s goal of net zero emissions by 2025 were established without clear evidence of achievability. This means the government must now draft a plan for the second time. Friends of the Earth, ClientEarth and the Good Law Project had taken legal action over the target last year, having successfully challenged the previous budgets set by the conservative government in 2022.

The Numbers

The Nuance

As was widely expected, the US Federal Reserve kept the target range for its policy rate unchanged at 5.25%-5.50%, the sixth consecutive meeting in which rates have not been adjusted. Fed Chair Jerome Powell commented that after starting 2024 with three months of faster-than-expected price increases, it “will take longer than previously expected” for policymakers to become comfortable that inflation will resume the decline towards 2%. He acknowledged the lack of recent progress in the Fed’s battle against rising consumer prices, but reiterated the view that interest rates are likely headed lower this year.

The latest policy rate decision did provide relief to a growing contingent of investors who were worried the Fed was eyeing more rate increases. Fortunately, US central bankers still believe the current policy rate is putting enough pressure on economic activity to bring inflation under control, despite the stronger than expected numbers.

Perhaps helping the Federal Reserve going forward, US job openings fell to a three-year low in March. Though the data indicated fewer people were quitting their jobs, signs of easing labour market conditions will aid the Federal Reserve in their fight against inflation. Additionally, US consumer confidence deteriorated in April, falling to its lowest level in more than 18 months. Worries about the labour market and income were cited as key reasons for reduced confidence.

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