In the world of central banking, the U.S. Federal Reserve usually assumes the leadership role and its global counterparts follow. The current dynamic, though, is shaping up as something different. As the Fed sits on the sidelines , with interest rates on hold since July 2023, others either already have started to ease or are contemplating cutting in the months ahead. Should the trend continue, that could push the Fed to take action sooner than markets expect, according to Citigroup. “The Fed is the central bank most able to chart its own course,” Citi economist Andrew Hollenhorst said in a client note Wednesday. “But an increased rate differential with the rest of the world and stronger dollar will give the Fed one more rationale for cutting rates this year.” The most recent development saw the Riksbank, Sweden’s Fed equivalent , approve a quarter percentage point reduction Wednesday, with an indication that two more cuts could come before the end of the year should the inflation outlook hold. It was the first time the Riksbank had cut since 2016 and takes its main policy rate down to 3.75%. The Fed’s policy rate has been locked in a targeted range between 5.25%-5.5% after a series of 11 hikes that began in March 2022. The Riksbank’s move was the second central bank cut of the year, as the Swiss National Bank reduced its key rate a quarter point in March in what was seen as a surprise action. Reductions from the Bank of England and European Central Bank are expected to come next, possibly within a month. Bank of America strategists think the BOE is more likely to cut in August, “but given the dovish noises from [BOE Governor Mark] Bailey and others, the door seems open for a June cut,” they said in a note. Should all that transpire, and inflation and economic growth slow in the U.S. , it will put the Fed in a tight spot, Citi’s Hollenhorst said. “If either US inflation or activity slow, the growing rate differential between the US and other countries is yet another marginal factor that will encourage the Fed to follow the global trend toward lower rates,” he wrote. Under normal circumstances, other central bankers would take their cues from the Fed. But ECB President Christine Lagarde made clear, in an interview last month with CNBC’s Sara Eisen, that it won’t be the case in the current cycle. “We are data-dependent. … It’s on that basis that we have to make our decisions,” Lagarde said then. “Hence, we are not Fed-dependent.” Futures pricing has been highly volatile in 2024, most recently anticipating the first cut to come in September, possibly followed by another in December, according to the CME Group’s FedWatch gauge. For its part, Citi has an out-of-consensus call of four cuts this year, which would be the equivalent of a move at all but one of the remaining Federal Open Market Committee meetings. “With the exception of Japan, developed markets are embarking on a program of rate cuts,” Hollenhorst said. “The Fed is signaling it may be slow to follow the global trend given the US economy has been ‘exceptional’ both in terms of resilient demand and the associated stickier core services inflation (in both shelter and non-shelter prices). But should either of those slow the Fed is likely to begin its own cutting cycle.”
