Weekly Update - Central Banks: Each on Their Own Path

The central banks return from the summer break highlighted divergent directions between the US Federal Reserve (Fed) and the European Central Bank (ECB). The Fed restarted its easing cycle, lowering its key rate to 4.25%, amid gradually accelerating inflation and a slowing labor market. Its communication suggests this cycle will continue into 2025, while maintaining vigilance on price trends within a still resilient economic environment. Conversely, the ECB opted for the status quo, keeping its key rate at 2%, considering monetary policy appropriate given a resilient activity, gradual disinflation, and prospects for fiscal stimulus. This framework remains supportive of equity markets while bolstering the euro against the dollar.

Fed: A Controlled Cut. As widely anticipated after the Jackson Hole symposium, the Fed cut its policy rate range by 25 basis points to 4.00–4.25% at its September 17 meeting. This decision comes as inflation nears 3%, driven by tariff increases deemed transitory by the Fed, while labor market indicators show a clear slowdown. The Fed prioritized hence its full employment goal, initiating a new rate-cutting cycle. Updated projections from the monetary policy committee indicate this trend will continue in 2025, with an expected range of 3.50–3.75% by year-end and a terminal rate estimated at 3% in 2027. Notably, amid debate over Fed independence, only the new governor Stephen Miran voted for a larger 50 basis point cut and a 3% target rate by the end of 2025.

At his press conference, Jerome Powell adopted a cautious tone, describing the cut as “risk management” and emphasizing that “there is no risk-free path at this stage.” He stressed the need to “keep an eye on inflation,” while reminding that the full employment goal cannot be overlooked. We therefore anticipate two more 25 basis point cuts in October and December. However, the pace should slow in 2026, amid still solid growth and a very gradual decline in inflation toward the 2% target.

ECB: Stability Maintained at 2%. As expected, the ECB kept the deposit facility rate at 2% during its September 11 meeting. Post-meeting statements confirmed that current monetary policy is deemed appropriate, and conditions for a further cut are “quite stringent.” Yet, the ECB’s macroeconomic scenario could justify a final cut in December: growth expected around 1% over the next two years, close to its potential, is accompanied by total and core inflation slightly below 2%. The expected disinflation of service prices and the still-slow recovery in several euro area economies could reinforce this stance.

A Still Supportive Environment for Equities and the Euro. Equity markets responded positively to these decisions, with major indices continuing to rise. The combination of moderate growth and more accommodative monetary policies supports our overweight strategy on equities. Furthermore, the Fed’s ratecutting cycle amid higher inflation contrasts with disinflation in Europe, leading to rising real rates in the euro area. This differential should continue to support the euro against the dollar, reinforcing our strategic currency positioning

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