The moment has finally arrived. After maintaining the Federal Funds rate at its highest level in two decades for over a year, the Federal Reserve is expected to begin lowering its key interest rate at its September meeting (18/09). Inflation has been steadily decelerating since April and is approaching the Fed's 2% target. At the same time, the labor market has shown clear signs of normalisation from the excessively tight conditions of recent years, with the underlying drivers of wage pressures beginning to subside.

With these encouraging trends confirmed in August, the Fed has gained sufficient confidence that the post-Covid inflationary surge is behind us, and that inflation is now on a sustainable trajectory toward the 2% target.

With slowing inflation, the Fed is now around targets on its dual mandate for inflation and employment. The currently restrictive monetary policy needs to be adjusted.

Almost all major central banks will hold a monetary policy meeting in September. In the current global context of soft economic growth and easing inflationary pressures, a vast majority of them are likely to cut their rate again after having already began in the past few months. The Bank of Canada (4/09), the ECB (12/09), the Bank of England and the Norges Bank (19/09), the Reserve Bank of Australia (24/09), the Riksbank of Sweden (25/09) and the Swiss National Bank (26/09) all have reasons to lower their key rate. Central banks in large Emerging Markets could also relax their monetary policy stance: the Banco Central do Brazil (18/09), the South Africa Reserve Bank (19/09) and the Banco de Mexico (26/09) will hold a meeting this month. As both supply-related and demand-driven pressures on prices abate across all economies, the global rate hike cycle of 2022/23 can now go into reverse.

One central bank notably stands out from the rest: the Bank of Japan, which sent shock waves through financial markets in the middle of the summer lull by raising its rate to 0.25%. Since then, economic and inflation data in Japan have remained resilient, indicating renewed positive momentum following the slowdown of 2023. The Japanese economy appears to have finally emerged from a 30-year period of deflation, as the series of shocks since 2020 has effectively disrupted prices across all levels. With inflation above 2%, real interest rates (nominal rates minus inflation) are still deeply negative in Japan, unlike in other developed economies, and the Bank of Japan has finally embraced the idea of gradually normalising its monetary policy. Future markets currently do not expect another rate hike when the BoJ meets in September (20/09).

However, economic data released ahead of the meeting could prompt the central bank to take another small step if signs of persistent inflationary and wage pressures emerge.

In this context, PMI Manufacturing (2/09) and Services (4/09), Labor Cash Earnings (5/09), PPI Inflation (12/09) and National CPI Inflation (20/09) could lead investors’ expectations around BoJ rates to be adjusted. This could have an impact on the yen and trigger another bout of volatility on global financial markets.

After an encouraging rebound early this year, economic activity in Europe has stalled in the middle of the spring. Domestic consumption in the service sector has been losing steam, except a golden parenthesis in France during the Olympics. Additionally, industrial activity has been contracting consistently since 2022, impacted by a bitter combination of weak China demand, energy supply issues, sanctions on Russia and higher interest rate levels. After a reassuring GDP growth in Q2, economic data has been disappointing since the beginning of the summer. Germany remains the weak link of the Eurozone due to its vulnerability to the industrial sector and subdued external demand. Meanwhile, the brief optimism surrounding the Summer Olympics in France has quickly given way to the harsh reality of a country without a functioning government or a parliamentary majority, just weeks before a crucial budget vote.