In 2024, monetary policy on both sides of the Atlantic followed similar paths. In making its third rate cut of the year this week, the US Federal Reserve (Fed) finally lowered rates at the same pace as the European Central Bank (ECB). Although the Fed was more aggressive at the start of its rate-cutting cycle, with an initial cut of 50 basis points last September, the two central banks have both cut rates by 100 basis points over the whole of 2024.

On one side of the Atlantic...

The recent fall in interest rates is mainly due to falling inflation in the United States and the eurozone. However, the growth and inflation projections recently updated by the two central banks point to some changes for 2025. In particular, the Fed could adjust rates at a different pace than the ECB.

The growth and inflation projections presented this week by the Fed show a slight improvement in the growth forecast for 2025, but also higher inflation than estimated in September (core PCE inflation rate of 2.5% compared with 2.2% previously). These adjustments in economic forecasts have led several Fed members to revise their expectations for future interest rate movements. The projections of the members of the monetary policy committee, set out in the “dot plot,” now indicate that only two rate cuts, of 25 basis points each, are expected for 2025, compared with four previously. This change in the Fed’s stance, which is less accommodative, triggered a strong reaction on the financial markets. Following the announcements, stock markets ended lower and bond yields rose. Although the less accommodative stance of the Fed’s monetary policy is mainly due to revised inflation forecasts, the uncertainty surrounding the new Trump administration’s economic policy may also have influenced this change.

... and on the other

In the eurozone, the ECB is likely to maintain its monetary easing at the current pace. According to the ECB’s updated macroeconomic projections, annual average inflation should reach the target of 2.1% in 2025, while GDP growth should rise from 0.7% in 2024 to 1.1% in 2025. Although the ECB remains cautious about inflation, particularly in services, the growth and inflation forecasts support its actions.

In 2025, the speed of rate cuts could therefore be very different between the Fed and the ECB, with a more cautious Fed and an ECB that continues to ease at the current pace. However, it is important to note that while the ECB is likely to continue at its current pace, it is keeping a close eye on the possible consequences of the economic policies of the new president-elect, Donald Trump. In addition, the ECB will carefully examine the effects of the interest rate differential resulting from these different monetary policy approaches. Against this backdrop, it comes as no surprise that ECB president Christine Lagarde has reiterated that the institution will continue to adopt a gradual approach and will remain attentive to the evolution of economic data.

is chief economist at Spuerkeess.

This article was originally published in .