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Why the ECB is ahead of the Fed in turning interest rates

According to the latest inflation data, the interest rate turnaround in the Eurozone is within reach. In the USA, however, things are different. The first interest rate cuts are not expected until later in the year. There are several reasons for this.

By Volker Hirth, ARD financial editorial team

The inflation rate in the USA is 3.5 percent, in Europe it is now only 2.4 percent. So Europe is in a better position – but not economically. And that is also the reason why Europe is one step ahead when it comes to inflation and key interest rates. The economy in the USA is booming. Among other things, through private consumption.

“The Fed will at least wait for the US elections”

In addition, Americans have higher wages on average than Europeans and can demand them because workers are wanted in the USA. US Federal Reserve Chairman Jerome Powell is concerned about this, as he explained in a recent interview. The unemployment rate is below four percent and has been stable for more than two years. That hasn't happened for more than half a century, Powell said.

The unemployment rate in the euro zone was recently 6.5 percent. Overall, consumption is weakening, especially in Europe's largest economy, Germany. The European Central Bank therefore has greater scope to relieve the burden on citizens through lower interest rates.

It is very likely that interest rates in Europe will fall faster than in the USA, says Robin Winkler. He is head of the economics department for Germany at Deutsche Bank: “We assume that the ECB will get started in June, the Fed will at least wait for the US elections.” That would mean that the ECB could then be half a year ahead of the Fed.

ECB is likely to submit

Jerome Powell is something like the chief diplomat of finance. Specifically, it is becoming rare. You always have to listen carefully to him and read between the lines. He confirmed that he sees little scope for a rate cut at the moment. As long as inflation remains this high, interest rates will remain high.

Unless the labor market unexpectedly weakens, the Fed chief emphasized. Unexpected – that is, Powell does not currently believe there is any weakness in the labor market. The ECB is almost certain to lead the Americans in terms of cutting interest rates.

Conflicts in the Middle East could change the situation

However, this will not happen in isolation from world politics, says Winkler. The Middle East conflict could throw a spanner in the works. If this escalates, it could lead to turbulence, especially in the raw materials markets: “If the price of oil were to rise, then that could make the situation at the ECB even more complicated.”

Perhaps we will then have to wait again to see how inflation develops. “But I think a lot would have to happen in the Middle East for the ECB not to start in June,” says the expert.

There will probably be no stock market earthquake

Now the markets were betting on falling interest rates, especially in the USA. That's obviously not happening at first. The disappointment about this is already noticeable on the stock markets, says Winkler from Deutsche Bank. But on the other hand, the prices would also be supported.

“I think this little turbulence on the markets last week can be traced back to this,” emphasizes the expert. “At the same time, the economy in the USA is booming, so the profits of US companies are also increasing and this is giving the markets a certain amount of ground.”

The interest rate turnaround that investors had been counting on is now coming with a delay. However, this certainty does not seem likely to lead to a stock market earthquake.

HR, tagesschau, April 17, 2024 3:20 p.m

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