Central banks struggle to regain the rates narrative

As expected, the U.S. Federal Reserve last week lowered interest rates by 25 basis points, giving the markets what was priced in, but disappointing in providing forward guidance.

Overall, the sense is that the Fed lacked solid conviction behind its decision, reflecting a wide dispersion in the views of the Federal Open Market Committee members on the economy and how best to manage a weakening labor market and above-target inflation.

Importantly, the Fed was not alone last week in demonstrating these characteristics. The Bank of Canada’s 25-basis-point cut and the Bank of England and Bank of Japan holding rates unchanged, similarly showed the difficulty for these institutions in managing the dynamics of these twin challenges and the complexity of providing clarity on the path forward.

The result, in our view, is that the outlook on the pace and extent of the rate-cutting cycle across these major economies is now more uncertain than it has been in a while despite broad-based acceptance that we are in a global easing cycle, led by the Fed.

Clearly the Fed is playing catch-up to other major central banks that have moved earlier and more aggressively in their monetary policy easing. But as we move through this more uncertain period for policy, we see attractive relative value opportunities emerging in the global rates market, a development our portfolios are well positioned for going into the final quarter of the year and 2026.

Opportunity amid uncertainty

One of the most attractive opportunities we see is the relative value dislocation between U.S. and European rates markets, driven by the disparity between the current policy levels of the Fed, BoE and European Central Bank.

The ECB held its key interest rate at 2% on September 11—half the level the policy rate was at last year—in contrast to the Fed’s current 4 – 4.25% range, and the BoE’s 4%.

While the ECB has held rates unchanged since June, we expect another cut to come before the end of this year, which would create opportunities across several eurozone countries and curves.

More broadly, we are also seeing interesting dynamics in the rates markets of the U.K., Canada and Japan.

Outlook for the Fed

Even though the Fed is playing catch-up, it has clearly indicated it is in an easing cycle, which we anticipate will deliver three additional cuts between now and early 2026, with a neutral rate settling around the 3.25 – 3.75% range.

However, big questions remain about the path to the neutral rate level.

Indeed, disparity is wider in views on this among the FOMC members, evidenced by the updated 2025 “dot plot” chart, on which each member records their view of the appropriate interest rate for the end of the year.

Seven of the 19 members expect no more rate cuts this year, and another two expect just one. The median expectation conceals a split committee, which included one member who thinks the fed funds rate should fall by 1.25 percentage points this year. This view was clearly from the committee’s newest member, Stephen Miran. He was the only dissenter – calling for a larger cut – while previous dissenters, governors Christopher Waller and Michelle Bowman, joined the majority this time for a smaller cut.

Regarding the neutral rate, we think the Miran dissent and dot-plot projection could act as a precursor of what the next Fed Chair delivers in 2026.

Wait-and-see in action

With the Fed and the BoC easing last week, the BoE and BoJ instead held interest rates unchanged, mirroring the ECB’s decision earlier this month.

The ECB has a constructive view on eurozone growth, jobs and inflation, but remains watchful of inflation and cautioned that higher tariffs and increased global competition would impact growth for the rest of the year.

In contrast, stubbornly elevated inflation and lackluster growth are more acute challenges for the U.K., forcing the BoE to hold its key rate at 4%. By the end of the year, we expect another cut to come.

Importantly, the central bank is also to dial back its annual quantitative tightening program—selling down its government bond holdings—from £100 billion to £70 billion to curb rising gilt yields. However, cash sales are set to increase to £21 billion from £13 billion due to the fall in passive quantitative tightening.

For the BoJ, which is in gradual tightening mode, it held rates at 0.5% in a contested vote and announced it would start selling its cache of exchange-traded funds (current market value of about $4.2 billion equivalent) and real estate investment trusts to support its efforts in monetary policy normalization.

The two dissents on the BoJ’s policy committee were the largest since Governor Ueda took office, indicating growing pressure on the bank to raise rates this year.

Despite some uncertainty about the path of rates due to the potential impact of tariffs, we are expecting the BoJ to raise rates by the end of the year.

Looking to 2026

After being in the background for much of the past year as markets wrestled with the economic consequences of fiscal and trade policy issues, monetary policy has come back to the forefront as the rate-cutting cycle under the Fed gets underway again.

Fiscal concerns are not going away and will likely come back into sharp focus, potentially causing some further turbulence at the long end of the rates market. But in the near term, central bank policy seems to be the main force holding sway over markets.

Despite some uncertainty around the pace and extent of easing in the U.S. and across other major economies as central banks deal with labor market and inflation challenges, we expect monetary loosening to continue, creating attractive relative value opportunities across global rates markets in the remainder of this year and into 2026.

Managed Fund

Neuberger Berman Strategic Income Fund

Global Fixed Income

View