ECB No Longer Dependent on the Fed?

A Shift Has Happened

In what is considered to be a shocking statement, Federal Reserve Chair Jerome Powell has signalled that policymakers will most likely be waiting for longer than anticipated to start cutting interest rates. 

This comes after a series of surprisingly high inflation readings.

Powell pointed out that there is a lack of progress when it comes to inflation data, emphasising that it will be taking more time for officials to gain enough confidence that price growth is headed toward the Fed’s goal. 
For reference, the Fed’s inflation goal is 2%.

If price pressures were to persist, Powell said that the Fed can keep rates steady for “as long as needed”.
 

“The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence,” stated the Chair on Tuesday on a panel discussion alongside Bank of Canada Governor.

Furthermore, Powell has highlighted that given the strength of labour market and progress on inflation, it is only appropriate to allow for restrictive policy for more time, and let the data guide the central bank.

However, it is to be noted that there has been a shift in tone in Powell’s overall statements, following a third straight month where inflation has exceeded analysts’ forecasts. There is no longer a sense of urgency for cutting rates anymore, and the approach has become more cautious and less passive.

Policymakers pencilled in three interest-rate cuts in a forecast published last month, but confidence has been shaken, with investors betting on just one to two cuts this year.

Any further reductions are to be expected at the end of year, if at all – which majorly diverges from what has been initially stated during Q1 of 2024.

However, the European Central Bank (ECB) seems to be on a different page.

Is the ECB One Step Ahead?

President Christine Lagarde has confirmed that the ECB is making its way to a reduction in interest rates as long as shocks do not derail the slowdown in euro-zone inflation.

According to her, officials are “observing a disinflationary process” that is currently in line with expectations, and should return consumer-price growth to 2% by mid-2025.

“If we don’t have a major shock in developments, we are heading towards a moment where we have to moderate the restrictive monetary policy that we have,” said Lagarde.

These remarks come just five days after the ECB strengthened expectations that cuts are to take place in June as inflation decreases.

That would be the first reduction since officials elevated borrowing costs to combat soaring prices, and with the US economy still running hot, is likely to precede any similar step taken by the Federal Reserve.

Does this mean that the ECB is longer dependent on the U.S. Fed?

ECB’s Path Dictated by Fed’s Actions?

Big central banks have ended their historic monetary tightening cycle but predictions about who will cut rates next, and how deeply, are diverging fast.

Doubts about how soon the Fed may cut interest rates have investors considering an unusual scenario: The ECB may beat Washington to the policy-easing punch.

In a previous press conference, ECB Lagarde acknowledged both the relevance and importance of developments in the U.S. economy – the world’s largest – to its policy setting. However, it has also been stressed that conditions in the euro zone are different.

“We are data-dependent, not Fed-dependent,” stated Christine Lagarde.

As mentioned previously, the European Central Bank is bracing for cuts starting June, in light of a continued fall in inflation in the 20 countries that share the euro. This comes in contrast to U.S. price growth.

However, even thought he ECB may protest that is no longer “Fed-dependent”, it will likely find itself singing from a hymn sheet written by the U.S. Federal Reserve – whether it likes it or not.

The European Central Bank shouldn’t be afraid to shift its “overly prudent” stance on interest rates away from that of the Federal Reserve, according to Governing Council member Yannis Stournaras.

“Now it’s time to diverge,” Stournaras said. 
“The situations in the euro area and the US are completely different. In the US demand is much stronger – mostly stemming from a push coming from the budget. We don’t have that in Europe. And inflation in the euro area was mostly supply-side led – not demand-side led, not led by wages.”

ECB’s decision in June is due one week before the Fed’s – which is set to prove one thing:

 Is the Europe economy decoupling from the U.S.?