The responsiveness of monetary policies to the macroeconomic context, and more specifically to inflation, is a recurring theme. This is currently particularly the case in the United States, where the Fed is the last central bank in the developed world (excluding Japan, of course) not to have begun its rate-cutting cycle, despite the fact that inflation has largely receded since peaking in 2022. Unlike in other regions, the strength of the US economy partly explains this cautious approach by FOMC members. This strength was once again confirmed last week by upward revisions to second-quarter GDP and consumer data, as well as better-than-expected US household income and spending figures for July. While this resilience means that the Fed is not rushing into its monetary “loosening” cycle, it is beginning to be forced into action as the gap between its key rates and inflation becomes wide. The publication of core PCE inflation in July, which came out at an annualized 2.6%, once again confirms that inflationary momentum has weakened to a large extent and, over the last few months, is in line with the 2% target. As Jerome Powell has often reminded us, the Fed will act (and this is relatively logical given the level of key rates) before inflation returns to its target. The window is therefore wide open to initiate this first cut at the September FOMC meeting, and the pace of subsequent cuts is becoming increasingly clear.
What about Europe? While the ECB indulged in its first rate cut in June, outpacing its American counterpart by a historic margin, since then it’s been a flatline, with the members of the European Central Bank seemingly displaying exacerbated caution in their rhetoric. And yet, unlike in the US, growth in the Eurozone cannot be said to be particularly vigorous (2.5% forecast for this year in the US vs. 0.7% in Europe). If anything, it has tended to surprise negatively since the start of the year. As for inflation, it seems to have never been so close to the ECB’s target. The eurozone price index fell to an annualized 2.2% in August from 2.6% the previous month, a 3-year low. However, this slowdown was mainly due to lower energy costs, while inflation in services accelerated over the month (4.2% vs. 4.0%), making it impossible to foresee any decline in this segment (see this week’s chart). While the ECB’s more hawkish members should not fail to emphasize this point to curb any inclination to cut rates too quickly, the European institution’s margins are not very wide given the weakness of growth. Moreover, while it’s true that “domestic inflation” remains a problem to be monitored, can the ECB totally ignore the overall level of inflation? While some of its members had argued that the Fed’s wait-and-see attitude had prompted them to do the same over the summer, the Fed’s scheduled rate cut in September could make it easier for the ECB to act in the future.
