Fed status quo may constrain ECB’s monetary options
The European Central Bank (ECB), poised to start cutting interest rates in June, faces a dilemma. With the U.S. Federal Reserve now likely to keep policy rates on hold for the foreseeable future, markets are questioning how much the ECB could diverge. In our view, a policy divergence is probable: We think the ECB will cut rates in 2024 without the Fed. However, the Fed’s prominence in global markets means the risks are skewed toward a slower pace of easing than what domestic circumstances might otherwise warrant, particularly if downward pressure on the euro intensifies.