Fed or the ECB: who will lead the monetary policy easing race?

Source: Forex Analysis

The two largest regulators of the world have practically abandoned their old rhetoric and openly declare the prospects for lowering interest rates and easing the monetary rate.

At the end of the May meeting, the US Central Bank kept the federal funds rate in the range of 2.25% to 2.5% per annum.

At the next meeting, which will be held next week, investors are waiting for the Fed to give a clearer signal of readiness for a “soft” policy.

A consensus forecast of analysts polled recently by The Wall Street Journal suggests a reduction in interest rates from the Fed to 2.12% by the end of 2019 and to 1.96% by the end of 2020. Thus, we are talking about a single act of monetary expansion, both in the current and in the following years.

The derivatives market now estimates the likelihood of a rate cut at 64% in July.


According to a number of experts, the Fed has no weighty reasons for easing the policy and the regulator can take a pause until autumn.

By this time, the financial results of American companies for the second quarter will already be known and it will be possible to understand how the trade frictions of the United States and China have influenced business sentiment in the third quarter.

“I believe that the Fed will keep the rate unchanged until September, and then lower it by 0.25% to signal a willingness and desire to act,” said Amy Cru Catts, an economist at AC Cutts & Associates.

Gregory Daco of Oxford Economics adheres to a similar point of view.

“Despite the fact that the US economy is in good condition, concerns about the deteriorating situation in the global industry, the US housing market, as well as the possible consequences of trade conflicts, speak in favor of lowering the Fed rate this fall,” he said.

Meanwhile, some analysts believe that the longer the Fed will “sit on the sidelines,”, the more it will have to loosen monetary policy in the future.

“The longer the Fed waits, the more it will have to lower the rate,” said Robert Fry, an economist at Robert Fry Economics LLC. He predicts that the regulator will cut the rate twice this year and leave it unchanged in the next.

Against the background of heightened expectations that the US Central Bank will ease monetary policy in the coming months, the USD index fell to two-month lows. But then, it managed to play some losses since the main competitors of the greenback, such as the euro and the pound have their own problems.

Although at the moment, the market regards easing of the monetary policy of the Fed as a predetermined decision. It is believed that the dollar will remain a highly profitable currency even after one or two cuts in the US interest rate.

Following the Fed, the ECB may join the easing race in monetary policy.

Last week, ECB President Mario Draghi gave the markets a fairly transparent hint of willingness to use additional incentives if the deterioration of the global economy and political uncertainty in the world continued to restrain GDP growth and inflation in the region.

“The ECB, having pumped nearly € 4 trillion into the markets in the course of two QE rounds, may not stop there. In addition, the Financial Institute is concerned about the potential strengthening of the euro against the dollar due to the likely reduction in interest rates in the United States and is considering the possibility of resuming the asset-buying program. However, such a scenario does not yet meet the necessary support in the leadership of the Central Bank, “Reuters reported, citing two sources close to the regulator.

“I will give you five reasons why the ECB can lower the rate,” one source said and repeated the words “euro rate” five times.

According to another source, the Central Bank can still tolerate the euro at $1.15, but a mark of $1.20 will become a “pain threshold” for the eurozone economy, according to the regulator.

Thus, interesting events may unfold in the coming months. The Fed will hold a regular meeting very soon and then the ECB will have to give its word.

The material has been provided by InstaForex Company – www.instaforex.com