Anything but a rate cut at the June ECB meeting would be a big surprise. Given how well the ECB has prepared markets and analysts for its change of course, it's natural that most attention is already centered around the question: what's next? ECB Governing Council members have so far been eager to emphasize that the path beyond June is uncertain. We attempt to bring some light into the dark, by sketching scearios for the future path the ECB might take. Knowing that the ECB's path is data-dependent, we still think that our long held view of a cautious quarterly rate cutting cycle by the ECB is the most likely outcome. |
The Fed kept interest rates unchanged at 5.25 to 5.5%. Rate cuts are not imminent as recent data releases have not increased the Fed's confidence in regaining price stability. Yet, raising interest rates further are not on the table. The Fed decided to slow the pace of balance sheet rundown (QT) from June onwards. A more gradual approach is intended to limit the risks of financial market turbulences from central bank liquidity becoming scarce. Treasury yields decreased because of the meeting and the US-dollar weakened. |
In 2023, all appeared to be set for a soft landing of the US economy, with inflation retreating and economic growth consistently surprising to the upside. However, price dynamics turned unfavourable as of early 2024, making obvious that it is too early to declare victory over inflation just yet. As of now, we do not see the disinflationary path in the US endangered in its entirety. However, caution is advised as far as the future development of growth and inflation goes. A lot depends on the further path of inflation as we move forward - data dependency hence remains crucial, also for the Federal Reserve. We use this interesting scenario to release a freshly updated edition of our US chartbook together with this publication. |
Disinflation hopes have been put to rest by the hotter than expected US inflation figures for March. This has implications for the Fed and financial markets. While we expect the mid-term disinflation trend to remain intact, an imminent cooling of inflation dynamics which could save a June rate cut seems out of reach. We now expect the Fed to cut in September, see US Treasury yields to stay high in the short-term before retreating over the mid-term and assess the US dollar to remain well-supported not only by a diverging Fed/ECB path but also by geopolitical risks. |
For one last time, the ECB has kept key interest rates unchanged. At the next meeting in June, however, everything will be ready to kick-start the rate cutting cycle. Today's ECB meeting should be seen as a preparatory one, at which no additional impulses were given. |