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“The Federal Reserve limits the space of the European Central Bank”

“The Federal Reserve limits the space of the European Central Bank”

Economy2 May 24 08:15Modified on 2 May 24 at 09:01author: Mark Van Harveld

As expected, the US central bank will leave interest rates unchanged for the time being because inflation is very high. Although inflation fell sharply last year, this development stopped at a level well above the target set by the Federal Reserve. “This is disappointing,” says Han de Jong, in-house economist at BNR, who points out that the Fed is thus limiting the scope for the ECB.

“The Federal Reserve limits the space of the European Central Bank”

Powell said the Fed is unlikely to raise interest rates, an option when inflation is high (Afghan National Police/AFP)

According to De Jong, Powell shows that he is still confident that things will work out in the end. Powell said the Fed is unlikely to raise interest rates, an option when inflation is high. Powell was positive about economic growth, because “it will continue.” Different benchmarks for inflation apply in the US, but both are very high, says de Jong, who adds that wage developments in the US are also higher than expected. “So the disinflation process is a bit stalled at the moment.”

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Two scenarios

When can we expect action from the Fed? De Jong points to two possible scenarios that Powell mentioned earlier, in which interest rates fall. The first is when inflation falls and sufficient confidence is established, and the second is when the labor market deteriorates very sharply. According to De Jong, this does not seem to be the case at the moment, although something strange is happening. “It looked like the Fed knew something we didn't know,” says De Jong, who is counting on a rate cut before the end of the year, but that is still months in the future.

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When asked yesterday, Powell denied that the Fed's decisions had anything to do with the upcoming presidential election, “but the fact remains that it would be very good for Biden if there was an interest rate cut before the election.” Of course, the opposite applies to his opponent, Trump. De Jong points out that despite Trump appointing Powell, the Fed Chairman then had to face a lot of criticism from Trump. “So, if Powell cuts rates and Trump wins the election, I think Trump will put him aside very quickly.”

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The European Central Bank's interest rate decision

The ECB will make a policy rate decision next June and when asked what we can expect there, De Jong said it was “very likely that the ECB will then cut interest rates.” But it is also likely that the Fed will not do so either. This may have consequences. If the ECB cuts interest rates while the Fed remains unchanged, a spread will arise.

Interest difference

The official interest rate differential between Europe and the United States is now 1 percent, and the capital market interest rate is 2 percent. This spread is growing and partly priced in, but the possibility that the euro will eventually weaken further against the dollar is increasing.' A weak euro and a stronger dollar means that goods imported from the US will become more expensive in Europe, which will fuel inflation to some extent. “If the Fed stays in place and leaves interest rates unchanged, the Fed is actually limiting the room for the ECB.”

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