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Economics Update February 2024 - Why interest rates will not fall any time soon

Bad Homburg, 2/6/2024
by Axel D. Angermann
  • Fed and ECB hold out prospect of interest rate cuts - cautious approach justified
  • Persistent risks to sustainable achievement of the 2 percent inflation target
  • Markets must lower their expectations

Neither the Fed nor the ECB have fundamentally changed course in the past two months, but they have clearly repositioned themselves: Both central banks have practically ruled out further interest rate hikes, meaning that they believe they can push the inflation rate down to the targeted level of 2% with the current restrictive orientation of their monetary policy. Both central banks are holding out the prospect of interest rate cuts this year, but are dampening the markets' overly high expectations. Fed Chairman Powell made it clear this week that interest rate cuts in March were "not the most likely scenario" and ECB Chairman Lagarde claimed that it was still "too early for the ECB Governing Council to discuss interest rate cuts".

Good reasons for the central banks' wait-and-see attitude

Looking at the fundamental environment, the central banks' caution seems justified: Inflation is continuing to fall and inflation rates close to the 2% mark are likely to be achieved this year, particularly in the eurozone. At the same time, however, there are still significant risks: Prices, excluding the volatile components of energy and food, continue to rise too quickly. Extrapolated for the year as a whole, the current figures still suggest an inflation rate of more than 3% in both the USA and the eurozone. It is therefore not yet certain that the 2 percent target will be achieved. In this situation, it is always better for central banks to use the current data situation to carefully analyze whether price momentum is actually weakening as desired, instead of rushing ahead and lowering interest rates and thus possibly encouraging a renewed rise in price momentum.

Focus on wage trends

Risks for both central banks lie in wage dynamics: the Congressional Budget Office has calculated that the inflation-neutral unemployment rate in the US is 4.4%, 0.7 percentage points higher than at present. This means that either the unemployment rate will remain low, as expected by the Fed, resulting in significant risks for a recovery in wage growth and thus inflation, or unemployment will have to rise, which, according to all previous experience, would lead to a recession in the US economy. At present, the US economy is still booming, which speaks more in favor of the first scenario than the second, at least for the time being. In the eurozone, the ECB says it is monitoring wage trends very closely: In the current environment of increased scarcity on the labor market, stronger wage increases are conceivable, which would favor a rebound in inflation or at least a persistence at a level of more than 2 percent. From a German perspective, this is countered by the ongoing economic weakness, which is now also making itself felt on the labor market. However, despite the stagnating economy, strikes for substantial wage increases are also on the rise in Germany, and Germany is not representative of the eurozone.

Central banks also have to reckon with external risks: An escalation of the crisis in the Middle East resulting in drastically rising oil prices remains a valid risk scenario. Although interest rate hikes would not be an appropriate response to such an external shock, the risk scenario in itself also suggests a cautious approach by central banks.

Interest rate cuts come later than expected

There are good reasons to assume that the announced interest rate cuts will come later and that there will be fewer downward steps overall than many market participants currently expect. It would only be plausible for the Fed to make six interest rate cuts by the end of the year if the US economy were to enter a recession in the second half of the year. This would not only allow the Fed to intervene more forcefully, but would actually make it necessary.


About Axel D. Angermann

As Chief Economist of the FERI Group, Axel D. Angermann analyzes the economic, monetary policy and structural developments of all markets that are important for asset allocation. His analyses form the basis for the strategic orientation of FERI's multi-asset strategy, for which the CIO of the FERI Group, Dr. Marcel V. Lähn, is responsible. Angermann himself has been responsible for FERI's analyses and forecasts for the overall economy and the international financial markets since 2008. He joined the company in 2002 as a macro analyst. His professional career began at the Max Planck Institute for Economics and the German Chemical Industry Association. Angermann studied economics in Berlin and Bayreuth.

About FERI

The FERI Group, headquartered in Bad Homburg, Germany, was founded in 1987 and has developed into one of the leading multi-asset investment houses in the German-speaking region. FERI offers tailor-made solutions for institutional investors, family assets and foundations in the business areas:

Founded in 2016, the FERI Cognitive Finance Institute acts as a strategic research center and creative think tank within the FERI Group, with a clear focus on innovative analyses and method development for long-term aspects of economic and capital market research.

Together with MLP, FERI currently manages assets of approximately €56 billion, including around €18 billion in alternative investments. In addition to its headquarters in Bad Homburg, the FERI Group has offices in Düsseldorf, Hamburg, Munich, Luxembourg, Vienna and Zurich.


Media relations contact

Marcel Renné

Chairman of the Board

Rathausplatz 8-10

D-61348 Bad Homburg

Axel Angermann