AXA IM: ECB to cut in June even if Fed postpones its own move

AXA IM: ECB to cut in June even if Fed postpones its own move

March 19, 2024

Monetary policy ECB Fed
ECB Europees Centrale Bank.jpg

There is a distinct risk Fed will be unable to cut at all this year, but this shouldn’t impact the ECB’s decision, according to AXA Investment Managers.

Tomorrow’s Fed meeting was seen as just another step in an orderly communication strategy leading to a rate cut in June. Yet, some key components of the dataflow continued to misbehave, and the latest ‘talk of town’ on the market is the risk that the central will find itself unable to cut at all this year.

For now, the market pricing is still broadly aligned with the December’s Fed forecasts with three cuts by year end, but the level of conviction has been falling and, as of last Friday, the market was pricing a probability of cutting in June only marginally above 50%, down from more than 80% just a few weeks ago.

'There is now a distinct risk the US central bank will be unable to cut at all this year because of a window for easing closing well ahead of the presidential elections,' AXA Group Chief Economist and AXA IM Head of Research Gilles Moëc says in his weekly Macrocast publication.

'Our long-held opinion on this is that there is no upside for the Fed in overthinking its behaviour around elections. The best course of action - both from a macro and reputational point of view - is to do exactly what the data and the usual reaction function would tell the FOMC to do. Beyond the need to protect its reputation against accusations of political bias, making monetary policy decisions (and sometimes not moving is a decision) on a guess of what the election outcome will be and the impact it could have on the fiscal stance would put the central bank on a slippery road, in effect pre-empting democratic decisions.'

How should the ECB navigate Fed uncertainty?

The risk that the Fed would cut later than expected – or not all – takes a particular resonance for the ECB, since the possibility of cutting independently was raised in a question to Christine Lagarde at the latest press conference.

The main – and possibly only – reason the ECB should care about the likely move by the Fed is because this could alter the European inflation trajectory via the exchange rate ramifications. Of course, if the ECB starts cutting – we expect them to start in June as well – while the Fed stays put would probably take the euro exchange rate further down.

'We do not think this effect should be overstated though,' Moëc says. 'Our conviction is that domestic conditions permitting, the ECB would still cut in June even if the Fed chose to postpone its own move.'

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