Central banks around the world are gearing up to lower interest rates this fall, bringing an end to an era of historically high borrowing costs. The U.S. Federal Reserve, European Central Bank, Bank of England, People’s Bank of China, Swiss National Bank, and others are expected to cut key rates, with the Fed likely making three 25 basis point cuts before the end of the year. The European Central Bank and Bank of England are also anticipated to reduce rates by 25 basis points multiple times this year, with further easing continuing into early 2025.
The global economy is expected to operate in a lower-rate environment next year, with reduced pressures from inflation. While there have been concerns of a recession, these fears have largely abated in the U.S. despite weaknesses in manufacturing-oriented economies like Germany. The stock markets have seen rebounds, with European stocks gaining nearly 10% in 2024 and the S&P 500 index up 17% so far this year. Market volatility, though previously high, has returned to below average levels, with equities remaining the asset class of choice for investors for the rest of this year and beyond.
Even with supportive Fed commentary, investors are watching U.S. job market data closely, with the next key report due on September 6. Experts believe a soft landing is achievable in the U.S. market, but are mindful of potential downside risks due to U.S. economic data. Bonds have shown strength over the summer, but there is uncertainty surrounding the pace of rate cuts and their impact on earnings momentum for equities. Technology stocks, in particular, remain resilient despite expectations of rate cuts which traditionally could harm growth.
In the currency markets, attention will continue to focus on the interplay between inflation, rate expectations, and economic growth. The euro’s rise against the dollar may impact market expectations regarding the timing of ECB rate cuts. In the U.S., the outcome of the upcoming election could influence the Fed, with potential changes to tariffs affecting inflation risk. Rabobank forecasts four Fed rate cuts between September and January, with the potential for the U.S. dollar to strengthen thereafter. The Bank of England’s rate cuts may be limited to once a quarter due to constraints from services sector inflation, driven by wage inflation.
Overall, central banks are expected to implement interest rate cuts in the coming months to support economic growth and mitigate inflation pressures. Investors are closely monitoring market movements and economic data to gauge the impact of rate cuts on various asset classes, particularly equities. Economic indicators and geopolitical events will play a crucial role in determining market sentiment and the trajectory of monetary policy moving forward.
