The central banks of the United States and the eurozone face similar challenging situations, but with different responses regarding interest rate policy. A member of the Federal Reserve, the US central bank, said in an interview with the BBC that US inflation was falling very slowly and that interest rate cuts should not be rushed. Raphael Bostic, president of the Atlanta Federal Reserve, highlighted the need to keep interest rates in the US at restrictive levels, possibly until the end of 2024.
On the contrary, the eurozone is on the verge of a reversal in interest rates, as current inflation data shows. The inflation rate in the euro zone is 2.4 percent, below the US rate of 3.5 percent. As reported by the Tagesschau, the reasons are varied. The European economy is experiencing weaker consumption, particularly in Germany, Europe's largest economy. This could give the European Central Bank (ECB) more room to maneuver to cut interest rates.
Signal for the markets: interest rate policy in the spotlight
Initially, markets expected interest rate cuts to begin in both the United States and Europe. These expectations have now been disappointed, mainly due to the strong US labor market. The U.S. unemployment rate remains stable below 4 percent, a situation not seen in half a century, Federal Reserve Chairman Jerome Powell said in an interview.
Experts such as Deutsche Bank's Robin Winkler believe the ECB is one step ahead and could take initial action as early as June, while the Federal Reserve could wait until after the US elections.
ECB has advantage despite possible geopolitical tensions
However, the geopolitical situation, particularly the conflict in the Middle East, could change the situation quickly. Rising oil prices, caused by escalating tensions, could affect inflation forecasts and cause the ECB to reconsider its decisions. However, the market still expects the ECB to reduce interest rates before the Federal Reserve.
No panic in stock markets despite delays in interest rate recovery
Although there is disappointment over less aggressive interest rate cuts, there have been no major shocks to stock markets so far. The strong US economy supports stock prices and mitigates the effects of the lack of interest rate changes in financial markets for the time being. Investors should therefore expect some delay in interest rate adjustments, but a massive market crash seems unlikely.