OR US central bank (Fed) took longer than the other major central banks to start their downward cycle interest ratesbut on Wednesday he did so in a resounding way.

It announced a cut of 50 basis points (half a percentage point), double the usual rate, while its officials predicted that monetary easing would continue at a rapid pace.

The median forecast of Fed officials is for a further half-point rate cut by the end of 2024 and an additional one point in 2025. That, if confirmed, would see the Fed’s key rate fall from 4.9 % to 4.4% in December and to 3.4% in December 2025.

This dynamic path prescribed by the Fed will also influence the decisions of the European Central Bank, which will probably need to accelerate interest rate cuts. And this, because a faster reduction in American interest rates would lead to a decline in the dollar’s exchange rate against the euro and consequently to an increase in imported inflation in the Eurozone.

OR ECB it has already cut its deposit rate by half a point to 3.5% from 4% in June, but has not committed to the speed and size of its further tapering, with decisions, it consistently says, being made at each meeting based on latest economic data on inflation and the economy in general.

After the meeting on 12 September, the president of the ECB, Christine Lagarde, had stated that in December there would be a lot of new data on the course of the economy, suggesting that this was the most likely time for another interest rate cut.

However, the possibility of an earlier reduction, at the October meeting, has not been ruled out, as noted by the vice-president of the ECB, Luis de Guidos, on Friday. Possibly, in fact, in the light of the Fed’s decision, the probability of this happening has increased, although other conditions will have to be met, such as a faster than expected reduction in inflation in the Eurozone in September and especially in the services sector or preliminary data on economic activity (PMI index) show a significant weakening of it.

Regardless, however, of whether euro interest rates will be cut in October, the ECB will be pressured by the Fedif its forecasts are confirmed, to move to faster interest rate cuts than the pace of a 25 bp cut. each quarter that has progressed to date.

Of course, the course of inflation and the economy on both sides of the Atlantic will be decisive in this regard. In the US, the economy continues to grow and unemployment has risen somewhat, but remains very low (estimated at 4.4% at the end of 2024). The estimate for a smooth landing of the American economy, despite the fact that interest rates increased a lot and remained at high levels for a long time, is the one that clearly prevails among analysts and economists. At the same time, inflation has eased significantly, to 2.5% year-on-year in August, which has dramatically boosted the Fed’s confidence that it will continue to ease toward its 2% target.

It should be noted that Fed officials’ forecasts for the course of interest rates are based on the above expectations. If these are not confirmed, then their de-escalation course will obviously be different. For example, if inflation falls below 2% or unemployment rises significantly, then interest rates will fall even faster, and vice versa.

The same applies to ECB interest rates: the faster inflation falls or the economy slows, the faster interest rates will fall. Eurozone inflation eased to 2.2% in August, with the ECB forecasting it to rise slightly in the fourth quarter of 2024 before retreating to its 2% target in the second half of 2025. The economic recovery remains fragile, with GDP to grow at a quarterly pace of 0.2% in the second quarter as the German economy teeters between stagnation and recession.