The Fed’s lessons from the past, central banks on hold next week and Switzerland opens up

Allianz Research Weekly |  08 December 2023

Executive summary

This week, we look at three important issues:

  • First, the Fed is learning from past tightening cycles. Here are the four key takeaways of the nine Fed tightening episodes since 1972: i) the full impact of monetary tightening will continue to weaken GDP growth for another 12 months; ii) the rapid disinflation this time around is atypical and definitely supports the soft-landing narrative; iii) main transmission channels (housing and corporate lending)are working according to textbooks, no more, no less; iv) profligate fiscal policy is clearly distorting monetary tightening this time around.
  • Second, major central banks to remain on hold until summer 2024. Next week is central banks week. We expect the Fed, the ECB and the BoE to maintain interest rates at current levels. As disinflation continues and evidence of an economic slowdown is building up, we expect central banks to pause for a good six months before the Fed (in June 2024), the ECB (in July), and the BoE (in September) start cutting interest rates. By December 2025, key rates should be at: 3.75% for the Fed, 2.75% for the ECB and 4% for the BoE, which is fighting stickier inflation and wage growth.
  • Third, by reducing its industrial import tariffs unilaterally to zero, Switzerland becomes one of the most open economies in the world. Starting from 1 January 2024, Switzerland will unilaterally abolish import duties on nearly all industrial goods, which could lead to import gains of about 12.3% or USD38.2bn annually. This should ultimately boost the competitive advantage of Swiss companies in manufacturing and assembling on the global stage.

Ludovic Subran

Allianz SE

Bjoern Griesbach

Allianz SE

Jasmin Gröschl

Allianz SE

Maxime Darmet

Allianz Trade