If the Federal Reserve waits to cut interest rates, will the European Central Bank follow suit?
If the Federal Reserve waits to cut interest rates, will the European Central Bank follow suit?
The March consumer price index wasn’t great news for anyone who hopes the Federal Reserve will cut interest rates soon. That includes other economies. Thursday, the European Central Bank said it is holding interest rates steady but will consider a cut in June. But with the Fed now seen as more likely to stand pat longer, some wonder if Europe will follow suit.
There are advantages to central banks acting together. Usually, they do so by default.
“Policy is often kind of correlated because [of] big, global shocks,” said Bill English, a finance professor at Yale University.
“Big, global shock” is basically the definition of a pandemic. We all know about the high inflation that it spurred in nearly all advanced economies. And some regions have been able to tamp down price gains faster than others. A year ago, inflation in the U.S. was 5%. In the European Union, it was more than 8%.
Now, inflation’s been rising again here and the EU is edging closer to its target. Which brings the European Central Bank to a bit of a fork in the road.
“If the economies are diverging, there’s no particular reason why you want to have the central banks doing the same thing,” English said.
If the ECB waits for the U.S. to cut rates, it could depress spending too much and force a recession. On the other hand, if the ECB feels like it has some wiggle room, waiting and coordinating with the U.S. might help its endgame.
“If you don’t make the move at similar times, there is some potential risk,” said Wenxin Du, a finance professor at Columbia University.
She said cutting rates significantly earlier than the U.S. could shift the exchange rate. If the Euro depreciates, import prices might rise and, as a result, so could inflation.
“The depreciation pressure in their home country might work against all these efforts against inflation,” Du said.
Now, central bank coordination matters less to the U.S.
Ken Kuttner, an economist who’s worked at the New York and Chicago Federal Reserve banks, said the Fed can act on its own with fewer consequences “since the U.S. is the 400-pound gorilla in financial markets.”
Still, central bank officials here and abroad must call each other, right? And chat about the day’s data points?
“I never rose to that rank of the Federal Reserve to know whether that’s the case,” Kuttner said.
We do know they gather at International Monetary Fund meetings. The next one is next week.
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