​US inflation has fallen significantly since 2023. At the end of 2023 and the beginning of 2024, US inflation hovered just above 3%, before falling to just below 3% for the remainder of 2024. In September 2024, inflation was on a promising trajectory before picking up in the remaining months. Under "normal" circumstances, inflation is expected to remain between 2% and 3% throughout 2025, with a tendency to fall to 2% by the end of the year. Although inflation has become a frequent topic of discussion, it is still important that it stays below 2% in order to stabilise the economy. Its importance has diminished, especially for the Federal Reserve, which has based most of its recent interest rate decisions on the US labour market. The Fed hiked rates aggressively in 2022 and 2023. Its rate rose to 5.25% - 5.5% by the end of 2023. Initially, markets expected rate cuts in early 2024 to gradually counteract the potential recession. The Fed did not cut rates until autumn 2024, citing the solid state of the economy due to a strong labour market. As soon as this market showed signs of weakness, the Fed began to cut rates aggressively, surprising market participants. However, in its latest cut to 4.25% - 4.5% in December 2024, Powell stated that the Fed would stop cutting aggressively in 2025. He outlined only two 25bp cuts in 2025, which would bring the federal funds rate to between 3.75% and 4% by the end of 2025. Prior to the meeting, expectations were for at least 1% cuts in 2025. Figure 1 shows these developments in more detail.

​There is no doubt that the US election has had a significant impact on market performance since last week. President-elect Trump achieved a decisive victory, including a win in the popular vote. Furthermore, the Republican Party also secured victories in both the House of Representatives and the Senate. This should facilitate the implementation of the majority of the planned changes. Following the confirmation of Trump as the winner, equities began to rally. While there was already a change in equity sentiment following the first rate cut by the Fed, confidence continued to grow when Trump emerged victorious. The conclusion of the US election in a relatively smooth process undoubtedly had a part to play. This has led to a reduction in uncertainty in global markets. The second significant factor is the election of Trump as President. Investors are confident that the new administration will make financial markets a priority, as was the case in his first term. As a result, the S&P 500 reached a new record high of 6,000 points for the first time. The Nasdaq reached a new milestone, surpassing the 19,000 mark for the first time. In the commodities market, this had the opposite effect. Gold, a traditional asset used to manage uncertainty, saw a decline from its previous highs. In the context of a bullish market sentiment, gold is perceived as a less attractive investment. Investors are inclined to hold risk-on assets with higher potential returns, as opposed to gold, which is used to mitigate risk. The price of gold fell from $2,700 to $2,550 over the past week. Crude oil initially gained, but soon began to decline. The Republican agenda supports fossil fuels and is likely to push the industry forward. This is likely to result in more supply and overall lower prices. WTI crude oil declined from $71 per barrel to $68. Lastly, the big winner from the US election result is the cryptocurrency market. Trump's campaign trail agenda was notably pro-crypto, with a particular emphasis on the potential for the US government to establish a Bitcoin reserve. It should also result in a clear regulation of cryptocurrencies during his tenure. This prospect prompted a surge in Bitcoin’s price, reaching a new record high of $93k. The subsequent 45% rally in slightly more than a week triggered another bull run in the cryptocurrency market, with Ethereum not far behind with gains of 38% in a single week. Figure 1 illustrates the price development since October 2024 and the impact of Trump as US President Elect.

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.