ECB Cuts Rates 25 Basis Points… Will the Federal Reserve Be Next?

By Katie Borchetta · June 7, 2024

The European Central Bank (ECB) has reduced interest rates, finally moving away from a record high, but has yet to state if further cuts will follow behind. President of ECP, Christine Lagarde lowered the key deposit rate from 4% to 3.75%, yesterday. The ECB kept it at 4% for the past nine months and noticed significant improvement in the future of inflation and kept the rate stagnant for as long as necessary.

Lagarde emphasized the uncertainty of if this change will be the beginning of multiple rate reductions and how they must have future data to make those decisions. The Governing Council stated they would continue to assess the situation each meeting and are not committed to a specific rate path, truly keeping people’s interest in mind. 

While Lagarde stated earlier that the inflation situation was under control, more recent data revealed that the price pressures, leading investors and economists to expect two to three rate cuts in the calendar year, with the next one anticipated to be in September. After the rate cut was announcement, the Euro rose 0.1% to $1.088 and German bonds increased by four whole points.

The ECB’s updated quarterly outlook predicts an inflation rate of 2.2% in 2025, which is up 0.5% from the last prediction. The update also revised 2024’s economic growth from 0.9% to 0.6%.

The higher inflation forecasts strengthen concerns about the inflation crisis, which may limit the potential for future cuts. The beforehand of yesterday’s meeting showed that policymakers were committed to reducing rates, despite some economic indicators not aligned as expected.

In the last month, inflation rose more than anticipated, and underlying trends continued to increase because of it. Wage growth continued to increase in the first quarter, creating high service prices.

Despite the aforementioned difficulties, the economy has rebounded stronger than expected. Not only did growth exceed expectations, but in April unemployment met a record low and improvements in the manufacturing sector. Lagarde stated that recovery was supported by stronger exports and services and a looser monetary policy. The ECB also noted that inflation and wage gains would fluctuate this year, but are expected to decline.

In contrast the United States added more jobs than economists expected in the last month, but the unemployment rate has also increased slightly. The mixed data makes it difficult for the Federal Reserve to decide if they should follow in the ECB’s footsteps and cut interest rates and how quickly to do so.

Despite the adding of 272,000 jobs, 92,000 more than expected, unemployment raised from 3.9% to 4%. Also, as wages continue to increase 4.1% each year, overall labor participation is on a decline. While overall unemployment levels increased, there were job gains in healthcare, government and hospitality industries.

The report that came out June 7 Friday morning lowers expectations that the Reserve will cut in September. An analysis of the report showed the chance of a rate cut dropping from 69% to a 53% chance.

So, the ECB is cautiously lowering interest rates to help the economy, while keeping an eye on inflation. In the U.S.; however, the job market is doing better than anticipated, which now complicates the Reserve’s decision on future rate cuts.