Fighting the Fed Would Be a Losing Battle for the BOE and ECB
The UK and euro area central banks have little choice but to lower their key interest rates twice before the end of 2024.
It’s rare you get a clean take from central bankers, but Federal Reserve Bank of Chicago President Austan Goolsbee didn’t mince his words on Monday. He said interest rates need to be lowered “significantly” to protect the US labor market and economy. He advocated “many more rate cuts over the next year.” Now that’s forward guidance even an aging journalist like me can comprehend. Europe should act just as aggressively.
The Fed’s confident messaging diverges dramatically from the dithering coming out of the Bank of England and the European Central Bank. Both cut rates before the Fed, but if there’s such a thing as first-mover advantage it’s been lost again by another bout of hand-wringing. The institutional wait-and-see mindset risks repeating the mistake of 2021 by taking too long to send definitive monetary policy signals. By only lowering interest rates by 25 basis points a quarter, both central banks aren’t leading but simply reacting to backward-looking data. It’s treading water for no discernable purpose.
They should be channeling the decisiveness of the Fed, which made a bold 50-basis-point start to its rate-cutting cycle, taking an insurance measure against an economic downturn. If the US economy fares better, it can pause. This comes even though September’s composite purchasing managers index is robustly in the expansion zone at 54.4. US inflation at 2.5% isn’t down to target, yet the Fed is clear it’s shifting focus to the employment side of its mandate.