Fed in no hurry to cut interest rates - ECB sees itself on course
For the US Federal Reserve, the situation is becoming clearer - but the Fed wants to confirm its impressions with more data before making a move. Until then, it is holding back on interest rate cuts. Powell stated, "Hesitation is bad, but so is haste," Fed Chair Jerome Powell said at the European Central Bank's central bank forum in Sintra, Portugal. The ECB has already taken a step further. However, it is concerned about growth.
The Federal Reserve, despite progress in the fight against inflation, is not in a hurry to turn towards a rate cut. The central bank can afford to take its time and get it right, Powell stated. There are risks associated with a too-rapid and a too-delayed approach. However, these risks are now in a better balance. A return of inflation to the Fed's target of two percent is not expected until the end of this year or the next.
On the way to a rate cut, the Federal Reserve is particularly focusing on the price development of a fixed basket of goods based on personal consumption expenditures by US consumers. This inflation measure - the PCE index - stabilized in May at the previous month's level. However, relatively high living expenses continue to weigh on consumption.
Powell stated, "We have made significant progress in the fight against inflation." However, more data is needed: "We just want to understand whether the levels we see truly reflect what is actually happening with underlying inflation," Powell said.
The Fed aims to use high-interest-rate policy to curb the inflation wave and cool down the labor market without stifling the economic engine. It keeps the benchmark rate in the range of 5.25% to 5.50%. With inflation in the US remaining sharp, many investors are betting on a rate cut as early as September. Powell did not comment on this in Sintra.
ECB: "Well ahead in the fight against high inflation"
The European Central Bank (ECB) is, according to its President Christine Lagarde, well ahead in the fight against high inflation. However, there are question marks regarding the economic recovery in the 20-country euro area, Lagarde said in Sintra. "We have made significant progress towards disinflation," Lagarde said. "This is moving in the right direction with the indicator we use." The inflation rate in the euro area fell to 2.5% in June. The ECB's target of 2.0% is not far off. Inflation was still above ten percent in early autumn 2022.
In twelve months, inflation is likely to be slightly above two percent, Lagarde said. The latest ECB economists' forecasts from early June predict that the central bank will reach its target marker in the fourth quarter of 2025. Lagarde added, "There will be a balance." The inflation in the service sector, which has been particularly stubborn, was 4.1% in both June and May.
Uncertainties exist regarding the growth prospects, Lagarde said. "We are in a slow recovery that began in the first quarter and which we hope will continue. (...) But all of this is subject to uncertainty and big question marks about the future."
The ECB completed the interest rate turnaround in June and lowered rates for the first time since almost five years, setting the key deposit rate at 3.75 percent from previously 4.00 percent. The ECB leadership, however, has remained tight-lipped about the further interest path. A further reduction in July is considered unlikely given the uncertainties.
- Christine Lagarde, the ECB President, stated that the ECB is "well ahead in the fight against high inflation," but expressed concerns about the economic recovery in the euro area.
- Lagarde mentioned that the euro area's inflation rate fell to 2.5% in June, with inflation likely to be slightly above the ECB's target of 2.0% in twelve months.
- The ECB completed its interest rate turnaround in June by lowering rates for the first time since nearly five years and setting the key deposit rate at 3.75%.
- Lagarde added that the uncertainties surrounding growth prospects and the balance between inflation and economic recovery make future interest rate decisions a delicate matter for the ECB.
- Jerome Powell, the Fed Chair, and Christine Lagarde discussed the economic situations and interest rate policies of their respective central banks at the European Central Bank's central bank forum in Sintra, Portugal.
