For much of 2026, we have suggested that major central banks would not need to deliver against expected policy rate hikes. Recent data have, at the margin, re-affirmed this view. More dovish policy outcomes relative to what markets anticipate—including shifts in official bond purchase programs recently announced by the U.S. Treasury—should support bond markets. Better projected earnings or cash flows with a lower discount applied can be a punchy mix for risk assets like equities too.
The path of steady nominal growth and steady-to-lower interest rates is not assured, however, with only a few occasions over the last 40 years where these conditions were met (absent a large external shock). A small handful saw other global central banks follow suit. Looking back at those periods, elements of 2016 and 2019 may offer us a guide.
History Rarely Repeats, But It Can Rhyme
Looking back over the dozen episodes of Fed “surprises” during the past four decades (where the Fed stayed on hold or cut rates when hikes were expected), eight were designed to restore growth and/or financial stability. Mulling over these episodes, elements of 2016 and 2019 warrant closer attention.
In both 2016 and 2019, global central banks did not deliver expected higher interest rates, with some choosing to ease instead. In 2016, Janet Yellen's Fed delivered just one of four expected rate rises; the BoE eased following Brexit; and the ECB cut deeper into negative territory when hikes were expected. The Q4 2018 rate shock led to the famous "pivot" from the Fed and other central banks, with the ECB resuming Quantitative Easing. Both growth and inflation were lower in 2016 than today, while 2019 was similar. In both years, risk markets rallied strongly, particularly after the 2019 episode.
Notable differences remain today, especially fuller asset valuations than we saw in either of those prior periods. Yet two parallels stand out. A key debate within the Fed in 2016 was prospectively allowing the economy to “run high pressure” over a short time frame to achieve better medium- to long-term growth outcomes. Where tightness on the supply side in 2016 was concentrated in labor, in 2026 it is in AI-related capex. In 2019, by contrast, the large interest rate moves in the final quarter of 2018 gave way to a sharp policy pivot in January, with both the Fed and ECB lowering rates. It is conceivable that moves in bond markets, particularly at the long end of the U.S. yield curve, are already starting to drive a policy shift.
Policy Is Modestly Restrictive Already
Our expectations for policy have evolved this year. The surge in commodity prices following the war in the Middle East, a sustained boom in AI-related capex and more stimulative fiscal policy globally pushed our prior expectation for interest rate cuts in 2026 out to 2027. But the need for actively tighter policy seemed—and remains—unclear. Current policy rates are already around our estimates of neutral in the U.S. and somewhat restrictive in Europe and the U.K., without much justification for further tightening.
Recent macroeconomic data and market movements have affirmed this perspective. For example: U.S. labor data, retail sales, housing and inflation were all softer than expected in July—even the Atlanta Fed GDP tracker has fallen significantly. European data has been firmer, as captured in economic surprise indices that are now the strongest amongst the majors. Underlying fragilities remain, however, as flagged by ECB Governing Council member Fabio Panetta in late July. European growth in Q2 was boosted by Irish accounting, business frontloading on energy costs and Germany support measures that have unwound (or are due to unwind), and European growth forecasts have consistently proven overoptimistic, especially in Germany. A second round of inflation from higher oil, threatening the ECB's singular price stability mandate, seems improbable in that context.
Market expectations for policy rate hikes have faded from their peak too: by between 15 basis points (in the case of the ECB and BoJ) to 60bps (U.K.) for 2026, where repricing has been most dramatic in both directions. Broadly though, the European Central Bank and Bank of Japan are expected to raise interest rates this year, by 65-70bps, followed by the Bank of England and the Fed at around 25bps each.
We disagree.
We expect the next move from most major central banks to be a cut, albeit later than we did coming into the year—i.e. in 2027 once inflation re-normalises. While we anticipate that the Bank of Japan will tighten policy, we expect a lower terminal rate vis-à-vis prevailing market pricing.
We also expect a generally decent global growth environment, supported in particular by significant capex outlays related to AI and related industries. The path of steady nominal growth and steady-to-lower global interest rates should be constructive for risk markets, notably equities where the chief drivers of returns—earnings or cash flows and discount rates—evolve positively. Historically, as we have seen above, these conditions are not unprecedented.
One potential risk scenario is that markets will force central banks to hike with continued pressure on long-dated bonds. On balance, as things stand, we would use any associated volatility to lean in to selective areas we favor. The U.S., EM Asia and Japan are our preferred equity regions, alongside long exposure to European (bunds) and U.K. duration. We also believe commodities and hedged strategies remain important diversifiers, and that the dollar seems vulnerable.
What to Watch For
Tuesday 08/25:
- U.S. CB Consumer Confidence
- U.S. New Home Sales
Wednesday 08/26:
- U.S. Consumer Price Index
- U.S. Q2 GDP
Thursday 08/27:
- U.S. Initial Jobless Claims
Friday 08/28:
- U.S. Jackson Hole Symposium