Morgan Stanley predicts that the Federal Open Market Committee (FOMC) will not change the interest rates at its May meeting. The balance sheet policy is also expected to remain steady, with attention on forward guidance due to policy uncertainty.

The Bank of England is expected to lower the Bank Rate by 25 basis points. There might be at least two members in favour of a 50-basis-point cut, indicating a more dovish internal stance.

Changes in Guidance Wording

The wording of guidance is anticipated to change, removing “gradual” to indicate readiness for sequential cuts. Morgan Stanley anticipates the Bank Rate will decrease to 3.25% by the end of 2025, from the current 4.50%.

Overall, while the Fed awaits clearer economic signals, the BoE may initiate an easing cycle among the major G10 central banks. This could occur with an increasing pace due to various economic and policy challenges.

This portion of the article is laying out expectations for monetary policy from both the Federal Reserve (Fed) and the Bank of England (BoE). In particular, it points out that the Fed is likely to hold interest rates steady at its next meeting, and rather than shifting its balance sheet or cutting rates, market participants should pay attention to how the Fed communicates its plans—especially in an environment where economic data offers mixed signals. At the same time, the BoE appears to be taking a more accommodative approach, with the first modest rate cut possibly coming soon, followed by further reductions over the next 18 months.

From a trading standpoint, the divergence in policy paths between these two major central banks offers opportunities—but also builds in unexpected risks. While the Fed remains patient, waiting for economic indicators to settle into a more consistent pattern, the BoE looks likely to act earlier, motivated by domestic economic softness and falling inflation expectations.

Monitoring Policy Updates for Market Responsiveness

Given this, it’s worth tuning into the tone taken by the policymakers rather than only measuring the size of rate moves. For example, if the more cautious members of the Monetary Policy Committee start to swing toward deeper cuts, then it becomes less a question of “if”, and more one of timing and scale. Traders positioned in rate-sensitive derivatives should evaluate what a scenario of rapidly declining UK short-term interest rates would do to current curve positioning.

These developments may also emphasise relative value trades across short-dated interest rate products. As we see policy divergence growing between the two central banks, the potential for volatility around future meetings increases. Volatility itself, of course, becomes a tradeable input.

One approach could be to watch short sterling versus SOFR futures, especially if the BoE’s path becomes clearer before the Fed’s. Emphasis should remain on cross-market spread behaviour rather than outright rate predictions, especially as expectations shift almost daily depending on the latest inflation print or wage growth revision.

In times like these, our focus tends to revert to terminal rate pricing, changes in central bank forward guidance, and the pace with which each central bank resets its communication. Traders leaning too heavily on current forward rates to imply fixed paths may find themselves misreading what is actually a live and reactive process.

Moreover, attention should be kept not just on upcoming meetings but also on minutes and speeches in the interim. These often contain subtle references to changing conditions or internal debates that will matter increasingly to short-term directional traders and vol managers alike.

The subtle adjustment in wording—specifically dropping terms that suggested slowly-unfolding rate policy—marks a shift worth monitoring. It signals that prior assumptions about gradualism no longer apply. For those managing duration risk, particularly in front-end curves, this shift means market responsiveness may quicken—and that returns will depend less on precise rate predictions and more on adaptability to tone and phrasing.

If the projected rate path to 3.25% plays out on schedule, then the question becomes not whether easing is happening, but how quickly markets are incorporating that into pricing. Reaction speed, more than prediction accuracy, will likely determine performance over the next few weeks.

As we move through upcoming economic releases, inflation numbers, and unexpected policy remarks, staying light on the page and quick to adjust becomes more helpful than holding firm to existing convictions. The narrative is bending toward one where speed—not just direction—matters.

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