The ECB led the way, with two steps. In September, the Fed has now cut its key interest rate too. Together with our chief economist Philipp Dobbert, we take a look at the consequences for markets and the economy.
There was long speculation about whether, and by how much, the Fed would cut its key rate in September. It opted for a step of 50 basis points. Is the size surprising?
Not really. Especially not if you remember what expectations were like at the turn of the year. Back then, there had been speculation that there could be up to six rate steps this year. But inflation proved much more stubborn than expected, particularly in the US. That's why the interest-rate turnaround was pushed back. Inflation is now significantly lower, and the economy remains robust. Many other central banks have already cut their key rates. The time was ripe.
One day after the decision, the S&P 500 rose to a new all-time high. With the interest-rate turnaround in the US, can we expect further price gains?
I keep warning against overly simple, single-cause explanations of market movements. There are always a thousand reasons why share prices move one way or the other. The key rate is important, but it's not the only thing that moves the markets. In principle, falling key rates are positive for the stock market. But whether, and when, the Fed will cut rates further remains open for now. Rates are still at a high level. In the US, the key rate is now in a corridor of 4.75 to 5.00 percent, and in the euro area at 3.65 percent.
How did the bond markets react?
Government bond prices rose too, especially short-term ones. That was to be expected. The rate step has now been priced in. What matters now, as always, is how expectations for the future develop.
High short-term and lower long-term yields: this constellation on the US bond market was long regarded as a harbinger of recession. Has anything changed about that?
Indeed, the phase in which yields on short-term government bonds were in part much higher than those on long-term ones is now over. Such an "inverted yield curve" has often preceded a recession in the past. Whether the signal "works" again this time should soon become clear. That may — but need not — happen. It's not a law of nature.
According to its own forecasts, the Fed expects growth of 1.9 to 2.1 percent in US gross domestic product this year. The forecasts for the coming year are similar. A positive signal for the markets?
In principle, yes. But I wouldn't raise expectations too high prematurely. Let me put it this way: if you've hit the brakes as hard with rate hikes as the Fed did in 2022 and 2023, then at some point skid marks really do have to become visible. If those don't turn out too pronounced, that would of course be good news — on the condition that inflation stays low at the same time.
In the euro area and the US, inflation has already had a two in front of the decimal point for a while. Isn't the inflation issue essentially settled?
By no means. We're only now in the decisive phase! When we currently see lower inflation rates, that has a lot to do with the fact that price increases for energy and many goods are no longer as strong as they were compared with last year. In Europe, by contrast, we're seeing at times marked price increases in services, for example. As a basic rule: the expectation of rising prices must not become entrenched. Otherwise inflation becomes entrenched. We still can't say how successful the central banks have been in fighting these inflation expectations.
So how do the current rate cuts affect the real economy?
Key-rate decisions set the direction, so to speak, for all other interest rates — especially when that direction changes. That's of course important for corporate financing. It can take a while before rate decisions have a noticeable effect on, for example, the level of lending rates: sooner or later, it feeds through. So when rates fall, the costs of corporate investment fall too. And it becomes less attractive to "park" money at interest instead of investing it. All of this gives the economy a boost. But rates are still at a high level for now.
Soon another decision will fall too, in the election for the next US presidency on 5 November. What influence does that have on the markets?
I think that if the election result is clear-cut and nothing out of the ordinary happens, the markets will very quickly move on to the day-to-day. Even a possible President Trump wouldn't be anything new for the markets, since 2016. The outcome of the election is certainly very important politically, even beyond the US. But the stock markets are focused on the economy.
