​It has finally happened. The Fed cut rates for the first time since the unprecedented hikes began in 2022. Throughout 2024, hikes were expected at almost every meeting and investors were consistently disappointed. Initially, falling inflation was the main driver of these expectations. Once inflation fell below 4%, there was little further decline. Traders argued that inflation had come down significantly and was likely to continue to do so even with lower interest rates due to the usually lagged effects of central bank measures. Instead, the central bank moved much more cautiously and wanted to monitor inflation developments. At one point, inflation proved to be sticky and did not fall much below 3%. Occasional fears of recession reappeared, offset by a strong labour market. These recession fears began to rise as soon as the labour market started to weaken. In recent months, the focus has shifted away from inflation. Instead, the focus has been entirely on employment data. This culminated in the run-up to the September meeting, when a first rate cut was almost inevitable for the hesitant Fed. Given this caution, most market participants were expecting a 25bps cut, with a few predicting a 50bps cut. Surprisingly, the Fed did indeed cut by 50bps to 4.75%, with comments on further cuts in its two remaining decisions this year. Expectations for the federal funds rate at the end of 2024 now range from 4% to 4.25%. Figure 1 shows this in more detail. The Bank of England has also cut rates only once this year, in August, while the European Central Bank has already cut twice. Switzerland stands out, as its central bank has cut interest rates three times in 2024, with the first cut already in March 2024.  Figure 2 shows the respective interest rates from January 2023 to September 2024.

​The eyes of market participants are on the upcoming Fed decision this week. So far, the Fed has not cut rates, which is in stark contrast to what the markets had expected earlier in the year and throughout the year. Inflation, a key factor in the decision, is showing promising signs but remains sticky. The very low unemployment rate has so far led the Fed to no interest cut, as the economy is in an acceptable state despite inflation. However, the indicator is also starting to worsen. Unemployment has been steadily rising in 2024. This is certainly a worrying trend, but at 4.2% the unemployment rate is still very low by historical standards. Volatile equity markets are another threat to a potential recession. The Fed's policy balancing act is therefore crucial. It is now widely expected that the Fed will cut rates by 25bps at the upcoming meeting, with some forecasting a 50bps cut, although support for this view has waned since the August economic data. Based on current expectations, market participants are pricing in between 50bps and 100bps of rate cuts by the end of 2024. At this point, a 50bps cut seems more likely, with a cut this week and in December, when the Fed has had some time to monitor the impact of the first cut. On the more optimistic end, a 50bps cut is expected this week, with two 25bps cuts in the following two meetings. Figure 1 shows the federal funds rate throughout 2024 and where it could end up by December 2024. The Fed's rate cuts have also been discussed more prominently following the ECB's rate cut. The ECB has cut its deposit facility rate twice to 3.5% in 2024 from 4% at the beginning of the year. Inflation in Europe has shown similar stickiness to that in the US. In contrast to the US, this stickiness has been at lower levels, which helps the ECB to justify rate cuts. While inflation in the US has mostly been between 3% and 4%, inflation in Europe has mostly been between 2% and 3%. For Europe, market participants expect one or two more 25bps cuts by the end of 2024.
This would leave the ECB's deposit facility rate between 3.25% and 3%. This path is shown in Figure 2.

​US equities have had an impressive run so far in 2024. Since July, however, markets have generally trended lower. With one exception in April, equities rose steadily until July. This resulted in peak performances of 50% for the Magnificent 7 and 25% for the Nasdaq. The Dow Jones Industrial Average gained just 5%. The stark differences in performance can be explained by what drove the stock market. With most macroeconomic indicators showing worrying signs, the labour market has so far offset most of the negative signals. However, the labour market is also becoming more worrying as unemployment rises. Interest rates were originally expected to be cut relatively early in the year, which also boosted equities. With no rate cuts this year and considerable uncertainty as to when the first cut will be made since the increases, equity markets have suffered. Now that the labour market looks weaker than before, the equity market is in a difficult position. These concerns led to a decline in July and early August, culminating in the unwinding of the USD-JPY carry trade, which caused huge losses. This, combined with recession fears, led to sharp declines around the world and a huge spike in volatility. Since then, equities have rallied, recovering much of their earlier losses. Figure 1 shows the performance of various US equity indices in 2024.