Market Review 23rd June 2025

Everything you need to know, Simplified!

Summary

• Central banks on pause, but under pressure: both the Bank of England (BoE) and the US Federal Reserve (Fed) held rates steady last week, opting for a gradual but cautious approach

• The Fed in the political crosshairs: Trump has stepped up his attacks on Chair Jerome Powell, accusing the central bank of political bias as it resists rate cuts, and the criticism is gaining traction amid tighter real rates

• Fiscal dominance takes the wheel: with high debt, trade uncertainty, and geopolitical fractures, monetary policy is losing potency

• Oil rallies on Middle East tensions: Brent climbed 3.7% last week, boosted by rising geopolitical risk after US strikes on Iran and threats to the Strait of Hormuz mean the risk of supply shocks remains elevated.

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Market Review

Monetary policy is no longer in the driver’s seat

Rates remain firmly in restrictive territory. Having held steady again last week, the BoE seems comfortable with a gradual approach to easing, while the Fed remains in ‘wait and see’ mode. Markets continue to debate whether we’ll get one or two cuts this year, while economists spar over where the new ‘neutral’ rate might lie. In the US, tensions are rising between the Trump administration and the Fed over its reluctance to ease policy. Despite all the noise, it’s increasingly clear that monetary policy is no longer steering the macro - it’s riding shotgun at best.

President Trump has grown more vocal in his criticism of the Chair of the Fed, Jerome Powell, recently dubbing him “Too Late Powell” and, just last week, “destructive.” Accusations of political bias are gaining traction primarily for the following reasons:

1. Inflation has fallen from 3.0% to 2.4% since January, with the Fed holding the policy rate at 4.25–4.5%, the real federal funds rate has effectively tightened by 0.6 percentage points

2. During Biden’s term, the Fed responded swiftly to signs of economic weakness with a 0.5% rate cut

3. In mid-2024, the Fed publicly pivoted toward prioritising the labour market, but that stance now appears to have reversed, as its latest Summary of Economic Projections saw the Federal Open Market Committee (FOMC) downgrade growth forecasts and raise inflation expectations, yet the rhetoric has turned more hawkish, suggesting inflation-fighting is once again the top priority.

These criticisms gain weight the longer the Fed sits in neutral. But from the Fed’s perspective, Trump’s policy agenda - especially on trade - has injected new uncertainty, with meaningful upside risks to inflation.

All of this underscores a bigger point: monetary policy has lost some of its edge. In an environment dominated by volatile trade policy, geopolitical ruptures, and a colossal budget deficit, central banks can no longer fine-tune macro conditions with the same precision. Fiscal dominance is increasingly evident. Furthermore, when debt and deficits swell, monetary and fiscal goals start to diverge. The interest rate required to contain inflation (the monetary r*) is now much higher than the rate consistent with debt sustainability (the fiscal r*).

Even when central banks do act, the transmission mechanism is weaker. Today’s service-led economies are structurally less sensitive to interest rates than the manufacturing-heavy economies of the past. In 1947, the US manufacturing-to-services ratio was 1:2; it’s now closer to 1:8. Services, which are driving inflation, tend to be less capital-intensive and more reliant on fiscal support. Monetary tightening mostly bites the goods sector, which now accounts for just 20% of US GDP. Add in the fact that household debt has been termed out (most of the US are on 30-year fixed-rate mortgages) alongside the sheer scale of fiscal stimulus, and it’s clear: the rate cycle doesn’t bite like it used to and monetary policy is no longer in the driver’s seat.

Oil continues to hedge geopolitics

In an otherwise directionless market last week, oil once again stood out. Brent rose 3.7% to close at $77/bbl. The rally has continued this morning following US strikes on Iranian nuclear facilities and Tehran’s retaliatory threat to blockade the Strait of Hormuz over the weekend. Further escalation looks likely. While Iran’s capacity to strike back is diminished and uncertain, the risk of renewed price shocks is rising, particularly if Saudi oil infrastructure becomes a target.

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The week ahead

Friday: US Core Personal Consumption Expenditures (PCE) inflation

Our thoughts: The Fed’s preferred measure of inflation is anticipated to show benign price growth of 0.1% in May, with rising pressure in the goods category from tariff passthrough offset by disinflation in services.

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