It’s pretty much central bank week: First, we had Federal Reserve Chair Jay Powell’s comments Wednesday underlining all the uncertainty the Fed is dealing with. President Donald Trump’s tariffs will likely push inflation up and growth down, meaning monetary policymakers will likely sit on the sidelines and keep interest rates as is for now.
Canada’s central bank held steady Wednesday after seven consecutive rate cuts.
And Thursday, the European Central Bank, as expected, cut its benchmark interest rate by 25 basis points to 2.25%. It’s the ECB’s seventh rate cut in a year, and there are likely more to come.
First thing to know is that the eurozone economy was already pretty weak before Trump started imposing tariffs and threatening more, throwing global trade and financial markets into turmoil.
The U.S., by contrast, headed into the year strong, said Gary Schlossberg, a global strategist at the Wells Fargo Investment Institute.
“We’re coming off growth of close to 2.5% in the final quarter of 2024. Europe was running a growth rate about a third of that,” he said.
And then Europe faced “a negative economic shock from the uncertainty from the Trump tariffs, potentially reduced export opportunities,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics.
Bottom line?
“These new headwinds in their economy could impact growth, makes them feel an urgency to cut interest rates,” said Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center.
Now, Europe does have other tools to strengthen its economy aside from lowering interest rates. Germany has launched a wave of fiscal stimulus, boosting defense and infrastructure spending.
And, said PIIE’s Kirkegaard, the EU is moving to reduce its dependence on exports to the huge U.S. market.
“They are now starting free-trade negotiations with Malaysia, Indonesia, the United Arab Emirates, potentially even India,” he said.
But all this takes time. In the meantime, it’s easy for the European Central Bank to cut interest rates now, because it has inflation well under control and lower rates aren’t likely to reverse that.
The situation’s totally different for the Fed, said Lipsky at the Atlantic Council.
“Because tariffs can lead to higher prices, this puts the Fed in a very difficult position, unlike its counterparts around the world,” he said.
While other central banks can keep lowering interest rates to stimulate growth, Lipsky said the Fed is stuck: It’s very reluctant to cut rates while there’s a risk that tariffs will push U.S. inflation higher again.
