Massive interest rate hikes by central banks have slowed down the economies of the US and the Eurozone. Recently, the Fed and the ECB signaled that they have ended the hikes. The American central bank even took a step further indicating 3 rate cuts in 2024. The market at one point priced in a reduction by 150 basis points, which is in large part exaggerated and perhaps there will soon need to be a reduction of these overly optimistic assumptions.
The December employment report from the US did not indicate greater weakness. The unemployment rate did not increase and remained at 3.7 percent. However, we must remember that monetary policy works with a significant delay, so the worst effects of massive interest rate hikes are likely still to come. In the United States, fiscal policy, which for a long time compensated for the dampening effects of monetary policy at the cost of escalating budget deficits, is currently unable to provide positive stimuli. The second quarter may be a difficult period for the US economy, as consumers and businesses will likely pull back on their purchasing decisions. It is hard to imagine a noticeable recovery in Europe after a weak second half of 2023. Massive ECB rate cuts would be a positive factor, but there are no signs of this happening at the moment.
Of course, if the economic situation in the US significantly weakens and the European economy continues to be weak, and if inflation starts to decrease at the same time, both institutions will start a cycle of rate cuts in 2024. After the December meetings of central banks, it appears that the Fed is closer to the date of the first reduction. However, data for January will likely be critical, possibly serving as a starting point for assessing the current situation.
Łukasz Zembik, Oanda TMS Brokers
