Major global investors are bracing for sharp market volatility after the Federal Reserve cut a massive interest rate that fueled confusion over whether the world’s dominant economy will experience a boom or recession.

The euro, sterling and currencies from Norway to Australia rose against the dollar on Thursday, a day after the Federal Reserve cut borrowing costs by 50 basis points from a 23-year high, as global stock prices hit records. US stocks rose sharply after an initially muted reaction to the Fed’s rate cut.

The Bank of England kept interest rates on hold on Thursday, citing uncertainty about inflation and global demand, in a sign that the central bank’s rate cuts are unnerving policymakers outside the US.

Traders scaled back their forecasts for a UK rate cut and some money managers warned the central bank could be supportive of an already strong US economy, boosting not only global growth but also potential commodity and consumer goods prices.

“I think the Fed is more likely to cut rates more and accelerate the economy,” said Trevor Greetham, head of multi-assets at Royal London.

“There won’t be a lot of (global) rate cuts then,” he said, adding that he expects market volatility to pick up from that point.

“I see more volatility, more risk,” said Tim Drayson, chief economist at the Legal and Public Investment Administration, citing the possibility of a slowdown in the U.S. economy.

He said LGIM, Britain’s biggest asset manager, was not currently taking strong positions in global stocks and bonds.

Deviation?

Traders expect the central bank’s key interest rate to fall by 72 basis points this year and by 195 basis points by October 2025.

They cut consensus bets for a quarter-point rate cut in Britain in November to 80% and think the European Central Bank is unlikely to cut rates next month.

These European rate-setters are struggling with slower growth than the US, but more stable inflation. Their policy and markets depend on the dispersion of unpredictable scenarios for the US economy.

Shamil Kohil, portfolio manager at Fidelity International, said weak growth in the U.S. and U.K. could prompt the BoE to cut interest rates faster and strengthen U.K. government bonds, known as gilts.

However, such stances are vulnerable if current expectations for further US rate cuts prove wrong, he said.

“It could be a situation where all markets are sold off,” he said, adding that he expects global market volatility to increase overall.

Kohil said his portfolio is defensively focused and prefers investment-grade corporate bonds.

Neil Mehta, portfolio manager at BluePay Asset Management, warned that the central bank was intervening in an “overheated” economy with GDP growth of 3% and inflation still above target.

Eurozone core inflation is below 3% and eurozone policymakers are divided on future interest rate cuts after cutting borrowing costs in June and September.

But if the central bank continues this way, further strength in the euro against the dollar will put pressure on the ECB, making exports less competitive, Greetham said.

Marcus Jennings, fixed income strategist at Schroders, said a dovish Fed coupled with a weak euro zone economy

German federal bonds are very attractive.

But investors warned that the outlook for global central banks could change if US data changes views on the central bank’s next move.

“If US employment shrinks, they (the central bank) will be more aggressive,” said Dario Perkins, head of macro at TS Lombard. “Then they start to panic a little bit. If employment picks up again, the policy says it’s not as big as they thought.

The VIX fell to 16.6 on Thursday, well below market volatility in early August due to a surprisingly weak US jobs report and subsequent currency market volatility (near 66).

The MSCI world stock index has risen more than 10% since the August 5 shock.

Sheldon McDonald, Marlborough’s chief investment officer, said market volatility could increase as stock market estimates point to a slowdown in Treasury prices while the US economy is buoyed by interest rate cuts.

Ben Gutteridge, multi-asset manager at Invesco, said that if central banks avoid a recession, that will boost trading focused on the differential between central banks.

However, a U.S. decline would weaken equities and support global bonds, reducing regional market divergence, he said.

“If you don’t want to lose money, you have to rate the Fed correctly.