This year, Switzerland, Sweden, Canada, the euro area, and the United Kingdom have all taken action earlier than historically considered by the Federal Reserve. The central banks of these economies need strong grounds to take action ahead of the Federal Reserve, as these measures bring risks of instability and currency devaluation.

As the manager of the world's largest economy, the Federal Reserve typically sets the tone for monetary policy, and its actions or inaction always have a global impact.

Interest rate changes in other countries may not have a significant impact on the Federal Reserve, but observing the behavior of other central banks may provide clues for the expectations of the U.S. economy and stock market when interest rates begin to decline.

Due to the delayed action compared to peers, the Federal Reserve may now need to act more quickly to prevent the excessive slowdown of the U.S. economy - the market expects the Federal Reserve to have four 25 basis point rate cuts by the end of the year, more than other countries. However, one fact demonstrated by other central banks is that even taking a step earlier in rate cuts may not be enough to prevent economic slowdown. The boost to the stock market may also quickly fade.

Andrzej Szczepaniak, an economist at Nomura Securities, said: "Because the Federal Reserve decided to wait, it may need to cut rates more sharply, but the macroeconomic prospects for the United States are still quite resilient. Now everything depends on the labor market."

Europe has been more concerned about its economy earlier than the Federal Reserve. Several countries in the euro area and the United Kingdom experienced some contraction at the end of last year.

Like the Federal Reserve, other central banks are trying to find a balance between slowing demand for rising prices and preventing a surge in unemployment.

In March, the Swiss National Bank lowered its benchmark interest rate by a quarter point to 1.5%, and further reduced it to 1.25% in June. Inflation has been well below 2%, and this early action has helped depreciate the Swiss franc against the US dollar and the euro. At the same time, economic growth in the second quarter accelerated compared to the first quarter. The Swiss National Bank, which is forecasted to have moderate growth this year, will make its next decision on September 26.

In May, it was Sweden's turn, marking the country's first interest rate cut since 2016. This move has also helped depreciate the Swedish krona and make Swedish exports more competitive. However, growth in the second quarter still slowed compared to the first quarter. The Swedish central bank lowered interest rates again in August, and signaled that there may be three more rate cuts this year to bring the economy back on track.

The Bank of Canada began cutting interest rates in June and continued to do so in July and the most recent decision on September 4th. Inflation remains above target but is slowing down. Concerns about slowing economic growth for the rest of the year are also intensifying.

Next is the European Central Bank, the second largest central bank in charge of the Eurozone's 20 countries. In June, it implemented a 25 basis points interest rate cut, as it had been announced months earlier. When the central bank took action, inflation was actually increasing, and economic growth and inflation forecasts were raised.

But since then, the outlook has worsened. Nomura Securities' Szczepaniak predicts that the European Central Bank will cut interest rates again this month, and once more before the end of the year. He also says that the Federal Reserve may take similar actions three times this year.

He added, "The market may be too optimistic in thinking that the Federal Reserve will do more than the European Central Bank."

Among the major Western central banks, the Bank of England stands out. The UK's inflation rate reached the 2% target as early as May, and it wasn't until August that the first 25 basis points interest rate cut took place, with a close voting result among the nine rate decision makers. Subsequent data showed a rise in inflation in July. The Bank of England also raised its growth forecast for this year, indicating a reluctance to further reduce interest rates.

Two lessons can be drawn from all these examples.

The first is that if the economy has already started to cool down, several interest rate cuts cannot prevent this situation, just like the lag effect of high interest rates suppressing inflation surge that began in 2022, which is often overlooked.

When Powell says the Fed is also concerned about the labor market and inflation, he is talking about a point in the future. The US unemployment rate rose to 4.3% in July, the highest since October 2021.

The second lesson is that the stock market's reaction to expected interest rate cuts is greater than the actual rate cuts themselves. Since March, the Swiss SMI index has fluctuated and remains below its high in 2021. The UK FTSE 100 index has not reached new highs since May. Meanwhile, the STOXX Europe 600 index and the Canadian stock market index reached record highs at the end of August. In contrast, although the S&P 500 index is currently close to its historic high, it has not hit a new record since July.

In summary, when central banks start cutting interest rates, it seems less important whether inflation has returned to the target level - the key is that interest rate expectations will return to the target level. In contrast, the help to the economy from interest rate cuts will often take a long time to show up after the rate cut actually happens.

The impact on the stock market seems to be more related to when the expectations of a rate cut are solidified rather than when they actually occur - therefore, the Fed's boost to the stock market may have already ended.

Editor/new