No, the Fed Isn’t the Icebreaker

Lately, obsessive central bank chatter has taken a new form. People scrutinize the Fed’s next move not only for its potential impact on the US economy and stocks, but because Fed moves allegedly signal other central banks to follow its lead. The widespread perception is that not only is the Fed the first mover, but its longer-term course is also something the rest follow. In our view, this focus is entirely misplaced, and not just because stocks and the economy have already proven they can thrive with higher rates and don’t need cuts. Simply: One central bank doesn’t predict another. History shows it.

Exhibit 1 shows policy rates from the Fed, Bank of England (BoE) and European Central Bank (ECB) since the euro came on the scene. As you will see, history is hardly a case of follow the leader.

Exhibit 1: Three Independent Central Banks Do Their Own Thing

Source: FactSet, as of 4/4/2024. Fed-Funds Target Rate, BoE Bank Rate and ECB Main Refi Rate, 12/31/1998 – 3/31/2024. Fed-funds series switches to the target range’s upper bound at December 2008, when the Fed adopted its current system.

The Fed may have been the first to hike at the end of the dot-com bubble and cut as it burst, but the BoE started the rate hike salvo in the bull market that followed. The Fed again led the charge with rate cuts in 2007, but the ECB launched a solo hiking campaign in 2011 and a cutting cycle after that, all while the Fed and BoE held steady. The BoE was next to diverge, cutting rates after the Brexit vote while the ECB held and the Fed hiked. The BoE eventually hiked a couple times that cycle, but nowhere near as much as the Fed did, and the ECB didn’t move at all. Then the Fed started cutting in 2019, a campaign the BoE didn’t join until COVID lockdowns. When this last tightening cycle began, the BoE launched it.

Some articles acknowledge the Fed isn’t always the first mover on rate hikes but write this off, saying the Fed always moves first on cuts. If you look only at the times the Fed has actually cut rates in the past two and a half decades, that might seem true enough. But it ignores the ECB’s solo cuts starting in late 2011. And the BoE’s 2016 cut. Oh, and the fact that the Swiss National Bank (SNB) has already broken the rate cut ice.

The SNB shows how this really works, in our view: Central bankers do what they think is best to fulfill their mandates, based on the conditions and data in the country (or in the ECB’s case, bloc of countries) they are responsible for. If this weren’t the case, the ECB wouldn’t have raised rates in 2011 due to mounting inflation concerns. Nor would the BoE have cut in response to concerns about the Brexit vote’s impact in 2016. And the SNB wouldn’t have deemed rate cuts beneficial in light of its own recent inflation history (inflation there never even approached the heights seen elsewhere in the Western hemisphere, and it slowed to just 1.0% y/y in March).^[i]

So no, the Fed doesn’t need to give the ECB and BoE implied permission by cutting rates first. Nor do its subsequent rate decisions have much to do with the ECB and BoE’s longer-term rate paths. It just wouldn’t make logical sense. The UK and parts of the eurozone have been flirting with recession for months and have finally shown some green shoots lately. Meanwhile, the US kept growing, and GDP even accelerated in recent quarters. The US, UK and eurozone may share disinflationary trends, but otherwise conditions are different. Central bankers will take it all in stride and do what makes most sense for their particular situations.

And most importantly, none of it will be a market driver. The prospect of rate cuts is too well known not to be priced in at this point, and—again—we have already seen cuts aren’t necessary for stocks to do fine. This is all a sideshow.