Frankfurt For a long time, the US Federal Reserve (Fed) was more aggressive in its rate hikes than the European Central Bank (ECB). She started tightening monetary policy earlier and on a larger scale. This week, however, the picture could reverse for the first time in a long time when the Fed on Wednesday and the ECB on Thursday decide on the further course. Most experts expect that the currency watchdogs in the euro zone will raise interest rates more than their American counterparts.
The US chief economist at the investment bank Goldman Sachs, David Mericle, assumes that interest rates will be lower in the USA. Leading central bank representatives had recently signaled this. In December, the Fed raised interest rates by half a percentage point to between 4.25 and 4.5 percent. “It is very likely that the Fed will reduce the size of further rate hikes to 25 basis points,” says Mericle, looking ahead to the next meetings in March and May.
Most other experts also assume that key interest rates in the USA will continue to rise until the summer. A problem for the Fed could be that investors are expecting interest rate cuts again for the time after that.
The markets are currently pricing in that the Fed will lower interest rates again to 4.5 percent by the end of the year after further increases by the summer. This expectation has already led to market interest rates, i.e. yields on US government bonds, falling recently.
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Financing conditions have tended to become looser as a result. However, this contradicts the Fed’s goal of continuing to fight inflation, which actually requires higher interest rates and tighter monetary policy.
Fed Chair Jerome Powell could therefore counter these expectations. The Fed’s leadership itself is forecasting an interest rate level of 5.1 percent by the end of the year.
Goldman Sachs economist Mericle assumes that the central bank is right with its forecast. “I don’t think the Fed will cut interest rates simply because inflation is falling.” Inflation will probably still be above the two percent target in 2024, at which the Fed sees price stability, and the labor market will remain tight by historical standards . “Therefore, I don’t see any strong impetus to lower interest rates and heat up the economy again.”
Contrary to the opinion of many other experts, Mericle does not expect a recession in the USA. “With a little patience, it’s possible to fix the inflation problem without triggering a recession,” he says. It is important to reduce the demand for workers. “Ideally, this can be achieved primarily through fewer job offers and not through a sharp increase in the unemployment rate.”
ECB struggling for medium-term course
Unlike the Fed, the ECB is likely to raise interest rates by half a percentage point on Thursday. The chief economist at the Dutch bank ING, Carsten Brzeski, considers this to be a foregone conclusion. “An interest rate hike of 50 basis points seems to be a done deal.” In December, the head of the central bank, Christine Lagarde, held out the prospect of several rate hikes of this magnitude. Investors should pay particular attention to what Lagarde says about further interest rate developments beyond the February meeting.
In an interview with the Handelsblatt, ECB Director Fabio Panetta spoke out in favor of keeping further steps open. On the other hand, advocates of a tighter monetary policy, such as the head of the Dutch central bank, Klaas Knot, are pushing for a further interest rate hike in March by half a percentage point. Bundesbank President Joachim Nagel also pointed out that the central bank had already announced that it would raise interest rates sharply in February and March.
The chief economist of the US fund company T. Rowe Price, Tomasz Wieladek, expects that Lagarde will link the interest rate hike by half a percentage point with a signal for a further tight course. From his point of view, this is supported by the recent rather positive economic data and the increased core inflation, i.e. the price increase adjusted for energy and food.
In December, the inflation rate in the currency area fell to 9.2 percent, but core inflation rose from 5 to 5.2 percent. “I think we can assume that the ECB will take a very restrictive stance in the next few meetings,” Wieladek expects.
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