​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.

Inflation has been a core topic since 2021, when inflation started to soar around the world. In response to this, the majority of central banks have taken the step of significantly increasing interest rates in order to combat the steep rise in inflation. Between the second half of 2022 and the first half of 2023, these measures, in conjunction with a stabilising economy, contributed to a reduction in inflation. By the end of 2023, inflation had fallen below 4% in most countries, as illustrated in Figure 1. While there have been significant differences in the prior years, the subsequent development has been consistent, albeit with varying magnitudes. In 2024 to date, inflation has stabilised, with most economies showing inflation rates between 2% and 4%. Switzerland is an exception, with inflation closer to 1%. In contrast to earlier expectations, inflation has proven to be more persistent than anticipated, with rates remaining above the frequently targeted maximum of 2%. The most notable exception was the UK, which has been hit hardest by inflation for the same reasons as other economies, but they still had to deal with the consequences of Brexit. Great Britain started in 2024 with an inflation of 4% and has since come down to 2%, where it remains steadily, whereas most other economies’ inflation has remained mostly flat throughout 2024.
As mentioned previously, central banks significantly raised interest rates to combat soaring inflation. The increases commenced at the end of 2021 and continued well into the summer of 2023, and autumn of 2023 for some countries. Since, interest rates were kept at these high levels for most of 2024 with some relief in some economies more recently. In March 2024, Switzerland became the first country to cut interest rates, followed by another reduction in June 2024. It is noteworthy that Switzerland is the only country where inflation has remained below the 2% target maximum since the summer of 2023. In June 2024, the European Central Bank followed suit by reducing interest rates (main refinancing operations rate) to 4.25%. More recently, the central bank hinted at a slower pace of interest rate cuts than anticipated after the initial cut. In August 2024, the Bank of England became the last economy to cut interest rates by 25bps to 5% in response to the promising development in inflation. In the United States, interest rates have remained unchanged since July 2023, currently sitting at 5.25%. The Fed has been hesitant to lower interest rates amid concerns about the stickiness of their inflation, as inflation has remained relatively steady since June 2023. It is also worth noting that Japan's situation is completely different. The country is renowned for its distinctive approach to monetary policy, exemplified by its central bank. The country maintained its negative interest rate throughout the period of the pandemic and its aftermath. In March 2024, the Bank of Japan increased interest rates and followed with an additional hike in July 2024. The first hike was particularly noteworthy, as the country had not raised its interest rates in 17 years. The second hike was to address two issues. The central bank also announced a bond tampering programme to boost the economy and raised interest rates significantly to combat the weakening Japanese Yen.

​Inflation and interest rates were key issues as central banks flooded the world economy with capital to combat the adverse effects of Covid-19. Inflation began to rise rapidly, reaching levels not seen for a long time. In the US, inflation rose to 9% by the summer of 2022. As inflation rose, the Federal Reserve began to raise interest rates aggressively in early 2022. When inflation peaked in the summer of 2022, it started to fall, reaching manageable levels of 3%-4% in the spring of 2023. So far, inflation has not really fallen below these levels. Interest rates were raised to 5.25%-5.5% by the summer of 2023. At the time, investors were expecting significant rate cuts in 2024, as inflation had fallen significantly and central bank measures typically have a significant time lag before they take effect. Investors were also more optimistic about rate cuts as a recession seemed inevitable. To combat a potential crisis, interest rate cuts could have mitigated the expected recession. Despite many common indicators, a recession has not (yet) materialised, even with geopolitical tensions around the globe. In addition, inflation has proved to be very sticky, which has prevented the Federal Reserve from lowering interest rates so far. Looking ahead to H2 2024, inflation is likely to remain at similar levels, with a slight tendency towards the 2% mark. Inflation could spike again if geopolitical tensions and the current wars escalate significantly. Currently, interest rates are expected to be lowered two times by 25bps by the end of 2024, which would bring the target rate to 4.75%-5%. Further cuts are unlikely and would only occur if inflation were to fall very soon and remain at these levels or fall further. No cuts or even hikes cannot be ruled out either, especially if inflation were to pick up again. Figure 1 shows the development of inflation and interest rates in the US since January 2022.

The macroeconomic situation in the US and Europe is evolving differently. The US has reacted more quickly to inflation, which has led to a faster decline in inflation than in Europe. Inflation in the US already reached 4% in May 2023, when it was still 8% in the EU and over 10% in the UK. Since then, US inflation has remained stable and has not fallen further. Inflation in the EU fell below 4% in October 2023. In contrast to the US, inflation in the EU continues to fall, slowly approaching 2% as of April 2024. In the UK, the development is even faster, with inflation falling well below 4% in February 2024 and the lowest of the three in April 2024.
These developments have led to very different outlooks for the expected rate cuts. At the beginning of the year, the Fed was expected to be the first to cut, with around 5-6 rate cuts estimated. With sticky inflation, markets are now pricing in 0-1 rate cuts for the remainder of 2024. The European Central Bank followed Switzerland's lead and cut rates by 25bps to 4.25% at its June meeting. How this process will continue remains relatively unknown. While further cuts are certainly expected in 2024, the number of cuts remains largely uncertain. The ECB is expected to review the June cut at its next meeting in order to provide more insight into where it is headed. The UK is also making positive headlines with inflation moving towards 2%, which has been rare in recent years with Brexit issues and the recent re-election. The Bank of England is widely expected to start cutting interest rates at its upcoming meeting. Figure 1 provides more details on the development of inflation and interest rates in recent years.