Fed is likely to cut policy rates in September – ECB will start lowering interest rates in June

Summary

Forecast changes

• We have not made significant changes to our economic forecasts this month. We continue to believe the global economy can grow 3% this year, even as geopolitical tensions have introduced some new uncertainties. Our forecast profiles for major economies have also not changed materially. In our view, the U.S. economy, while on pace to achieve a “soft landing”, is slowing, while economic recoveries in the Eurozone and U.K. are under way.

• In our view, the Fed is likely to cut policy rates in September; however, we believe risks are tilted toward a later shift to more accommodative Fed monetary policy. Internationally, we maintain our view that the ECB will start lowering interest rates in June, while the BoE will likely make its pivot in August. Our most noteworthy central bank forecast change is in Brazil. Given the most recent policymaker communications and fears of fiscal loosening, we now believe BCB policymakers will keep rates on hold through the end of 2025.

• Our outlook for the U.S. dollar has not changed materially, and we continue to believe the greenback can strengthen into Q3-2024. Longer term, we believe an extended period of greenback depreciation can materialize as the Fed eases monetary policy and global financial conditions ease. In an environment of Fed rate cuts, we believe the Japanese yen can outperform, while select emerging market currencies can also perform well.

Key themes

• The global economy faces a myriad of challenges; however, global economic growth remains resilient. With that said, the composition of global growth is starting to change as the U.S. economy is showing clearer signs of deceleration, while major foreign economies are demonstrating signs of recovery. In our view, growth trends are changing and starting to swing toward international economies, and U.S. exceptionalism is starting to fade.

• Diverging paths for monetary policy has become a prominent theme in global financial markets. Select G10 central banks—including the Fed and Reserve Bank of Australia—have leaned less dovish recently, while other G10 institutions have already started, or are about to start, lowering interest rates. Similar divergences are apparent in the emerging markets, where select institutions are easing, while others have either kept rates on hold or are approaching the end of their respective easing cycles.

• The U.S. dollar continues to be primarily influenced by Federal Reserve monetary policy. With the Fed shifting to a slightly less dovish stance, we continue to believe the dollar can broadly strengthen over the next several months. Once the Fed makes a clear pivot to rate cuts, we believe depreciation pressures can build on the greenback, and a downtrend in the dollar can persist for most of 2025. Economic growth trends becoming more favorable for international economies relative to the U.S. can also act as a long-term headwind for the greenback.

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