Don’t Count on a Sustained Fed-ECB Decoupling, Schnabel Says

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(Bloomberg) — It would be wrong to expect a persistent policy divergence between the US Federal Reserve and the European Central Bank, according to Executive Board member Isabel Schnabel.

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“I expect this trade conflict to play out as a global shock that’s working for both global demand and supply — we can discuss which of the two effects on inflation is larger because that that determines the net effect,” the German central banker said on Saturday. 

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“But in any case, I would not expect a sustained decoupling,” she said at the 31. Dubrovnik Economic Conference. “And this is also what you see in market pricing.”

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The ECB and the Fed raised interest rates in sync when inflation quickened in 2021 and 2022 and both started lowering borrowing costs in 2024. But while officials in Frankfurt cut eight times to 2% from 4%, with the latest move on Thursday, the US central bank has been on hold since December 2024, with the federal funds rate in a range of 4.25%-4.5%.

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Fed officials are scheduled to meet June 17-18 in Washington and are widely expected to leave their benchmark rate unchanged. Many policymakers have said they want to wait for more clarity over how President Donald Trump’s policies on trade, immigration and taxation will affect the economy before they alter rates.

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Despite diverging economic trajectories, inflation in the US and Europe shot up in the aftermath of the pandemic and retreated almost simultaneously after peaking in mid-2022. Some ECB officials including Schnabel have argued that inflation is becoming an increasingly global phenomenon.

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More recently, however, price growth on both sides of the Atlantic somewhat diverged. While proven to be more sticky in the US, it even eased below the ECB’s 2% target in May and is projected to average at 1.6% in 2026. At the same time Trump’s trade policies could raise prices in the US while it’s widely seen as disinflationary in the euro area due a weaker dollar, the softening of demand from slower global growth and the diversion of cheap Asian exports.

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“The argument goes that if China can no longer export to the United States, they’re going to flood the rest of the world and especially Europe with cheap goods — and that could then lead to high inflation in the US and low inflation in Europe,” Schnabel said. “I would argue that this effect is actually quantitatively quite small.” 

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And even if “the effects were not small, you can be sure that there would be counteracting measures coming from the European Commission,” she said. “Therefore I would argue this is not an argument for divergence.”

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President Christine Lagarde said Thursday that the cutting campaign is nearing an end as the ECB is now “in a good position” to navigate uncertainties ahead. Some officials see borrowing costs already at their final destination, according to people familiar with their thinking.