​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.

​The US election campaign is moving fast. Trump is leading the polls, although the race is likely to be very close. After the assassination attempt on Trump, the Republicans moved their conference forward and declared Trump as their nominee with Vance as his vice-presidential candidate. Trump has been the clear Republican nominee since relatively early in the primaries, when he won most of the votes. On the Democratic side, things have also been complicated. Initially, Biden seemed to have the nomination wrapped up, but this was gradually called into question. Since the Biden-Trump televised debate, voices around Biden's state have grown louder, leading to Biden's decision to withdraw from the race and endorse Harris as the Democratic presidential nominee. Harris kicked off her candidacy with a strong speech. Although Harris does not yet have the Democratic nomination, it is likely that she will soon be announced as the official Democratic candidate. Her late entry into the race certainly complicates the situation, but the polls do not seem to have changed much from when Biden was the Democratic frontrunner. A more detailed comparison of the two candidates' agendas, along with more debates, will provide more details. Trump is currently leading, but the election will be close.
Meanwhile, equity markets have also been on the move. In recent weeks, equity markets have mostly fallen. Increasingly high valuations of technology companies led to concerns and triggered several sell-offs in recent days. This was exacerbated by poor financial results from Alphabet and Tesla. Since 10 July 2024, the Magnificent 7 have lost more than 10%, wiping out $1.7tn in value in a matter of weeks. Figure 1 shows the fall of the Magnificent 7 alongside other major US indices, which also fell, but by a much smaller amount. The results of Apple and Microsoft in the coming weeks will be crucial in determining whether the current slide can be halted or accelerated. The S&P 500 and Nasdaq also fell significantly, again largely driven by the Magnificent 7 and other tech-oriented companies in the indices. The Dow Jones managed to limit the fall significantly, as part of the recent decline has been a shift from riskier tech stocks to more quality oriented companies.

​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.