The Fed's action is imminent, and the "interest rate cut map" of global central banks has been laid out!

This year, Switzerland, Sweden, Canada, the Eurozone, and the United Kingdom have all taken action earlier than historically considered by the Federal Reserve. The central banks of these economies need strong justifications to act before 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 usually sets the tone for monetary policy, and its actions or inactions always have a global impact.

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

Due to acting later than their peers, the Federal Reserve may now need to act more quickly to prevent the U.S. economy from slowing down excessively - the market expects the Federal Reserve to cut interest rates by 25 basis points four times by the end of the year, more than other countries. However, a fact shown by other central banks is that even being one step ahead 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: "Due to the Federal Reserve's decision to wait, it may need to cut interest rates more sharply, but the U.S. macroeconomic outlook remains quite resilient. Now everything depends on the labor market."

Europe felt concerned about its economy earlier than the Federal Reserve, with several countries in the Eurozone and the UK experiencing contractions 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 cut its benchmark interest rate by a quarter point to 1.5% and lowered it again to 1.25% in June. Inflation has been well below 2%, and this early action helped the Swiss Franc depreciate against the U.S. dollar and the Euro. Meanwhile, economic growth accelerated in the second quarter from the first quarter. The Swiss National Bank is expected to make its next decision on September 26th, forecasting moderate growth this year.

In May, it was Sweden's turn, marking the country's first rate cut since 2016. This also helped the Swedish Krona depreciate, making Swedish exports more competitive. However, growth in the second quarter still slowed compared to the first quarter. The Swedish central bank cut rates again in August and indicated that it may cut rates three more times this year to get the economy back on track.

The Bank of Canada started cutting rates in June and continued to do so in July and in the latest decision on September 4th. Inflation is still above target but slowing down. Concerns about slowing economic growth for the rest of the year are also increasing.

Next was the European Central Bank, the second-largest central bank responsible for 20 countries in the Eurozone, which cut rates by 25 basis points in June, as announced months earlier. When the bank took action, inflation was actually rising - economic growth and inflation forecasts were also revised upwards at that time.

However, the outlook has deteriorated since then. Szczepaniak of Nomura Securities predicts that the European Central Bank will cut rates again this month and once more before the end of the year. He mentioned that the Federal Reserve may also take three actions 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 returned to the 2% target as early as May, with the first 25 basis point rate cut not happening until August, and the voting results of the nine rate decision makers were also very close. Subsequent data showed another rise in inflation in July. The Bank of England also raised its growth forecast for this year, indicating reluctance to further cut 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 rate cuts may not prevent this situation—just as there is a lag effect in high rates to curb inflation surge starting in 2022. However, this is often overlooked.

When Powell said that the Federal Reserve is equally concerned about the labor market and inflation, he was talking about a future point. 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 rate cut expectations is larger than the rate cuts themselves. Since March, the Swiss SMI index has fluctuated and remains below its 2021 peak. The UK's FTSE 100 index has not hit a new high since May. Meanwhile, the STOXX Europe 600 index and the Canadian stock market index hit all-time highs at the end of August. In contrast, although the S&P 500 index is currently close to its all-time high, it has not set a new record since July.

In conclusion, when central banks start cutting rates, it seems less important whether inflation has returned to target levels—the key is that rate expectations will return to target levels. In contrast, the economic benefits of rate cuts mostly take a long time to materialize after the rate cut actually occurs.

The impact on the stock market seems more related to when rate cut expectations are consolidated rather than when they actually happen—thus the Fed's boost to the stock market may have already ended.