- Fed Chair Jerome Powell and ECB President Christine Lagarde will discuss monetary policy at the ECB Forum on Central Banking.
- Comments on the divergence in monetary policy between the Fed and the ECB could trigger a market reaction.
- Investors see a less than 40% chance that the Fed will leave interest rates unchanged in September.
Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde will attend a monetary policy panel at the ECB Forum on Central Banking 2024 in Sintra on Tuesday, July 2. The panel will be moderated by CNBC host Sara Eisen.
Divergence in Fed and ECB policy
The Fed left its policy rate unchanged in the 5.25%-5.5% range following its June policy meeting, and is widely expected to keep rates unchanged in July. At the post-meeting press conference, Chairman Jerome Powell noted that they need to see more positive data to reinforce their confidence that inflation is heading toward the 2% target before considering a policy change.
On the other hand, the ECB announced on June 6 that it had cut key rates by 25 basis points, citing improved underlying inflation dynamics and the strength of monetary policy transmission.
However, both central banks noted that they will remain data-driven and take policy decisions at each meeting.
The latest decisions by the Fed and ECB point to a divergence in monetary policy. Investors will be scrutinizing comments on the outlook for interest rates, inflation expectations and growth prospects to see whether the policy gap could widen in the near to medium term.
Central Banks FAQs
Central banks have a key mandate which is to ensure price stability in a country or region. Economies constantly face inflation or deflation when prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the job of the central bank to keep demand in line by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has an important tool to raise or lower inflation: changing its benchmark interest rate. At pre-announced times, the central bank will issue a statement with its benchmark interest rate and give additional reasons for why it is holding or changing it (cutting or raising it). Local banks will adjust their savings and lending rates accordingly, which in turn will make it harder or easier for citizens to earn profits on their savings or for companies to borrow and invest in their businesses. When the central bank raises interest rates substantially, it is called monetary tightening. When it lowers its benchmark rate, it is called monetary easing.
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a particular conviction about how the central bank should control inflation and the resulting monetary policy. Members who want very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while being content with inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward saving and want to keep inflation under control at all times are called “hawks,” and they will not rest until inflation is at or just below 2%.
Typically, there is a chairman who chairs each meeting, has to build consensus between hawks or doves, and has the final say when votes must be split to avoid a 50-50 tie on whether current policy should be tightened. The chairman will make speeches, which can often be followed live, in which he or she will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance to the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is called a silent period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
