AXA IM: Fed might be doing too much and ECB too little

September 25, 2024

Interest Rates Central bank Monetary policy

The balance of 'transatlantic risks' is the same as at the beginning of the year, says Gilles Moëc, AXA Group Chief Economist and Head of AXA IM Research. 'The Fed may well end up doing too much, and the ECB too little,' Moëc says in his weekly Macrocast.

Gilles Moëc highlights the uncertainties surrounding U.S. fiscal policy, particularly the impacts of the Biden administration's Inflation Reduction Act (IRA) and Chips Act, which may result in a neutral to slightly expansionary fiscal stance. In contrast, a potential Trump administration could implement significant tax cuts to counter tariff-related purchasing power declines, leading to a more expansionary policy that may drive inflation higher.

Moëc emphasizes that the situation in Europe is less uncercentain. 'First of all, it is difficult to argue that inflation cooled down in the Euro area within a 'soft landing' configuration. It rather seems that Europe is stuck in a sort of never-ending incapacity to take off. The Euro area has been repeatedly brushing with recession since it exited from the pandemic. Even when taking the gap in potential growth into account, Europe is much closer to a nasty downturn than the US,' Moëc writes.

Considering the restrictive fiscal policy expected in Europe next year, the overall direction is clear, even if the scale can be debated. This contrasts with the U.S., where uncertainty persists due to the upcoming election. Moëc adds that 'the risk of inflation ultimately undershooting the ECB target and falling back under 2% remains significant and should be met with a clearer commitment to an easing trajectory by the Governing Council.'

He adds that the Fed's decision last week should make a dovish conversion by the ECB easier, since it reduces the risk the euro would depreciate significantly if the pace of rate cuts accelerated in in the Euro area, but that is might take time for such a conversion to materialize, given the state of the debate at the Governing Council.

'In the end, we could see the monetary policy trajectory of the Fed and the ECB appear as two 'mirror hockey sticks': the ECB would initially refuse to cut quickly, before being ultimately forced into an acceleration by deteriorating macro conditions and inflation falling faster than in their central scenario, while the Fed would follow the symmetric 'hockey stick' shape, cutting initially quickly before being stopped out by a rebound in inflation triggered by expansionary fiscal policy and trade tariffs,' Moëc concludes.