At the beginning of the year, the money market anticipated six rate cuts for the Fed, six for the ECB, and five for the Bank of England for 2024. This was without considering the resilience of growth, which has reduced the urgency to ease monetary policy, and the more volatile-than-expected inflation in some cases, particularly in the United States. Now, the market expects only two rate cuts by the ECB and one by the Fed and the Bank of England. These expectations are obviously subject to changes.

No Rate Cuts for the Fed in 2024?

Nevertheless, it's hard to deny that the window for rate cuts is rapidly closing across the Atlantic. Consumer prices are up 3.4% year-over-year, and it seems unlikely that the Fed will pivot unless inflation falls below 3% for several consecutive months. ”We expect US inflation will plateau around 3% over the summer before dropping below this symbolic threshold only by the end of the year. If our forecast is accurate, the Fed may simply not cut rates in 2024. This is no longer an outlandish scenario,” says Alin Latu.

Short-Term Visibility

While there is significant uncertainty surrounding the short-term evolution of monetary policy in the US, the date for a first rate cut has been set in the Eurozone: this Thursday. This was confirmed in recent days by all the dovish members of the Governing Council and ECB Chief Economist Philip Lane.

The rate cut will be modest, -25 basis points, and the timing is appropriate for two main reasons:

• European growth reached its lowest level in the first quarter. It's now slowly picking up, especially in the manufacturing sector. Easing credit conditions for businesses, resulting from the rate cut, would be welcome.
• The fear of a wage-price spiral is no longer relevant. For instance, the recent wage negotiations in Germany saw retail sector unions secure a 14% wage increase a few days ago. This seems substantial at first glance, but this increase will be spread over 36 months and is primarily a catch-up with inflation after years of wage moderation. The ECB expects the recent wage increases negotiated in several eurozone countries to be absorbed by company margins, which should help normalize domestic inflation.

What's next?

This is where it gets complicated. The Governor of the Bank of France, François Villeroy de Galhau, recently advocated for two consecutive rate cuts in June and July. Not all Governing Council members agree. Many prefer not to commit to a schedule, reminding that the ECB is "data dependent."

Attuned to financial markets, Philip Lane provided some valuable insights in his recent speech. This year's goal is to ease monetary policy while keeping it somewhat restrictive to avoid unexpected inflation spikes. This aligns with three or four 25 basis point rate cuts. Next year, the goal will be to bring monetary policy to neutral territory, implying another three or four similar rate cuts.

ECB Rate cut before the Fed: A historical anomaly

Let's not forget that the ECB, even if it denies it, is also "Fed dependent." The ECB lowering its rates before the Fed is a historical anomaly that could have negative consequences on the euro's exchange rate. Robert Holzmann, Governor of the National Bank of Austria, emphasized this in his recent speech. He supports a rate cut on June 6 but fears that the euro's depreciation due to monetary decoupling between the US and the eurozone could complicate the ECB's task by exacerbating imported inflation.