What do markets expect post-Powell, Lagarde’s recent statements?

Powell Cites “Actual Advancement” While Central Bankers Evaluate War Against Inflation. Christine Lagarde, the head of the European Central Bank, and Jerome H. Powell, the chair of the Federal Reserve, both sounded upbeat about recent inflation figures but emphasized the need for greater confidence before cutting interest rates.

Over the past 18 months, there has been a slowdown in inflation in both the US and Europe. As a result, leaders of the Federal Reserve and the European Central Bank, such as Christine Lagarde and Jerome H. Powell, are attempting to determine how much more needs to be done to completely eradicate inflation.

The Federal Reserve’s head, Jerome Powell, stated that the Fed has “made quite a bit of progress” in reversing price hikes and that inflation in the US was once again declining.


At the annual meeting of the European Central Bank in Sintra, Portugal, on Tuesday, Mr. Powell stated that inflation “now shows signs of resuming its disinflationary trend.” After the Fed’s battle against inflation encountered a roadblock early this year, the message was upbeat.

Interest rates are now set at 5.3 percent, the highest level in decades. Fed policymakers have been holding off on cutting rates until they see more progress on inflation. Mr. Powell did not specify when authorities could start reducing borrowing costs, but he did hint that rates could be lowered if inflation figures persisted as they were or if the labour market deteriorated.

“We have the ability to take our time and get this right,” Mr. Powell continued, “but what we’d like to see is more data like what we’ve been seeing recently.”

The head of the European Central Bank, Christine Lagarde, was seated next to Mr. Powell on the panel and stated that following the first rate cut in June, European officials were likewise not in a rush to reduce rates again. She also said that E.C.B. authorities would regularly reevaluate if economic data provided them enough confidence to lower interest rates even further.

She stated that inflation is “heading in the right direction.” However, we continue to think that there will probably be difficulties till the end of 2024.
In order to bring inflation back to their 2 percent targets, central bankers have been attempting to gauge how much work they must put into stifling price pressures as inflation has slowed in both the US and Europe over the past 18 months. In May, the preferred inflation gauge by the Fed registered 2.6 percent. According to data released on Tuesday, the annual inflation rate in the eurozone decreased to 2.5 percent in June.

Since July 2023, the Fed has maintained stable interest rates. Although officials had earlier anticipated cutting interest rates multiple times this year, they have instead kept borrowing costs unchanged thus far in anticipation of further indications of declining inflation. Investors now anticipate that the one or two rate cuts that the Fed may implement before the year’s conclusion could occur in September, as most Fed officials predicted at their June meeting.

Mr. Powell said that he wouldn’t be “landing on any specific date today” in response to a question about when a rate decrease may occur. However, he also pointed out that there were dangers associated with moving too soon as well as too late. If you move too soon, inflation can continue to rise. Arriving too late runs the risk of overstretching the economy and causing a recession.

“We have two-sided risks now more so than we did a year ago,” Mr. Powell said. “That’s a big change.”

Mr. Powell noted that some of the lingering inflation in services in the United States was the delayed result of earlier trends, like a run-up in market-based rent costs that had only slowly fed into official data. He recognized that Fed officials did not expect to lower inflation fully back to their goal this year.

“The main thing is, we’re making real progress,” he said.

While inflation in the United States and Europe has followed a relatively similar trajectory for the past three years, their economies have diverged significantly. The United States has grown surprisingly strongly, but the eurozone is only just emerging from five quarters of economic stagnation.

The E.C.B. cut interest rates last month for the first time since 2019, as policymakers forecast inflation would return to 2 percent late next year. But European officials have resisted indicating how many more rate cuts could come, as they are wary of stubborn inflation in the services sector. Last month, services inflation in the eurozone held at 4.1 percent.

“Services is the difficult one,” Ms. Lagarde said. Policymakers are trying to understand whether services inflation has been caused by permanent changes in the sector or by prices catching up to other areas that have seen rising inflation, such as energy.

The E.C.B. is not expected to cut rates at its meeting in July, but some investors are betting that rates could be lowered in September, when the central bank publishes new economic forecasts. Traders are betting on one or two more rate cuts this year.

Mr. Powell and Ms. Lagarde spoke in front of current and former policymakers from around the world, as well as academic and bank economists, gathered to discuss “monetary policy in an era of transformation.”

Earlier on Tuesday, attendees debated whether the recent surge in inflation in the United States and Europe was caused by supply shocks, like shipping disruptions during the coronavirus pandemic and Russia’s invasion of Ukraine, or an increase in demand from expansionary fiscal policies and pent-up demand after lockdowns. They also worried about how geopolitical risks, including wars and trade tariffs, tended to lead to higher inflation.