The Federal Reserve has signaled that there will be fewer interest-rate cuts this year. According to the Fed’s message, officials are now anticipating only one rate cut this year, down from three projected in March. Moreover, they expect the easing cycle to end at a higher level than expected, indicating higher rates will persist.
Decisions of Other Central Banks
On the other hand, the Bank of Canada has lowered its rate by 25 basis points to 4.75%, making it the first G7 central bank to start an easing cycle. The European Central Bank followed by cutting its key rate to 3.75%, and the Swiss National Bank made a cut in March.
The Fed’s different path impacts the global economy by strengthening the dollar and attracting foreign capital away from other economies. This could lead to harmful currency volatility and reduce efforts to reduce inflation.
Kristina Hooper, chief global market strategist at Invesco said that the whole Western developed economies are going for gradual rate cuts. She added that the Fed is not leading this time.
Recently, Powell said they do not expect to lower the federal funds rate until they are confident inflation is increasing to 2%. He added that this year’s data had not provided that confidence. Policymakers have said that various paths are possible, allowing for divergence without causing market volatility.
Bank of Canada Governor Tiff Macklem said on Wednesday that there are limits to interest rate divergence, but they are not close to this limit. This split has made the 2024 trend of investing in American assets and the dollar more strong.
What the Economists Say?
Simona Delle Chiaie said that Powell’s indication that the Fed might keep rates high for longer. This decision raises questions about how other central banks can cut rates without causing exchange-rate volatility and risking inflation progress.
Nathan Thooft from Manulife Investment Management said that the Federal Reserve is considered the more cautious bank than other central banks worldwide. He added that, eventually, the Fed will begin cutting rates like others.
Jerome Haegeli, chief economist at Swiss Re and a former central bank official in Switzerland, said that even if the Fed cuts rates, the reductions are expected to be modest. He added that certain inflationary pressures persistently exceed the 2% target. Haegeli added that the market’s short-term outlook may overlook this, and he believes that the Fed will likely cut rates less aggressively compared to previous cycles.
ECB Governing Council member Joachim Nagel said at the event in Montreal that central banks on both sides of the Atlantic must be more resolute than inflation.
The Fed is not the only central bank adopting a cautious stance. The BOJ is pressured to tighten policy due to its weak currency, while the Reserve Bank of Australia continues to warn about ongoing inflationary pressures.
Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, said that another risk of cutting rates earlier than planned could lead to inflation increasing again, making rate hikes necessary.
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