The Fed and ECB Go Their Own Ways with Interest Rates…for Now

Both the Federal Reserve and the European Central Bank (ECB) met this week to set policy interest rates, each hiking their targets by 25 basis points. That’s where the similarities end: the Fed signaled it probably won’t hike rates again this cycle, while the ECB sent a message that more hikes are all but certain.

What explains the diverging paths—and how long will they stay that way?

The Fed Takes a Pause to Survey the Landscape

The Fed’s decision to pause was based on the cumulative weight from 500 basis points (5.0%) of rate hikes over the past year. Because monetary policy works with a lag, the US economy is only starting to feel the impact of the rate hikes, so the full effect won’t be seen until further down the road.

It makes sense to pause and assess the extent to which tighter policy could restrain economic growth—especially given mounting evidence that it’s already working. Home prices have fallen over the past year as mortgage rates have surged. Inflation seems to have peaked and is poised to cool. Labor demand is starting to wane as well, with both hiring rates and job openings slowing.