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The European Central Bank signals cuts in June. Will the Fed follow the ECB's lead?

Christine Lagarde, chief of the European Central Bank (ECB), has recently indicated that the ECB was planning on cutting interest rates but this cut will, of course, be contingent on projections, which confirm that inflation will continue to head downward. And this decision to cut interest rates in June could greatly impact the Fed’s monetary policy regarding interest rates as well.

The Eurozone has held interest rates since bringing them to a record high in September. And June has been flagged as a key month by numerous members of the ECB’s Governing Council, which votes on the path of rates. Christine Lagarde stated in a speech in Frankfurt: “By June we will have a new set of projections that will confirm whether the inflation path we foresaw in our March forecast remains valid.”

The June meeting has been signaled as a pivotal point in monetary policy for many economists, as it will be the first gathering for which data from spring wage negotiations will be available. The ECB is clearly on the alert for potential knock-on-inflation effects from rising salaries.

The ECB’s decision to cut rates in June if inflation continues to head downward could send a signal to the Federal Reserve that it might also be time to cut rates at home. So far, Jerome Powell has been recalcitrant towards the idea of dumping rates. He believes that inflation is still too hot for the central bank to take a chance in dropping rates.

Dropping interest rates, however, will have a significant impact on the trajectory of the U.S. economy. Lowering interest rates typically encourages borrowing and spending by both consumers and businesses. When interest rates are lower, borrowing becomes cheaper, leading to increased consumer spending on items like homes, cars, and other goods and services. Additionally, businesses may be more inclined to borrow money to invest in expansion, research, or equipment, which can stimulate economic growth.

Moreover, cutting rates can make it more attractive for businesses to borrow money to invest in new projects or expand existing operations. This can lead to increased capital investment, job creation, and overall economic activity. However, it is important to stress that it will have a negative impact on savers.

Lower interest rates can be detrimental to savers, particularly those relying on interest income from savings accounts, bonds, or other fixed-income investments. With lower interest rates, the returns on these investments may decrease, potentially impacting retirees and others on fixed incomes.

Jerome Powell is set to speak on March 20, 2024, about the macroeconomic conditions of the U.S. economy, and so far, we should not expect him to dramatically change his mind on rate cuts. But the ECB’s move could potentially sway the Fed to reconsider their position.

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