European Central Bank Has Raised Interest Rates, Will Our Own Central Bank Follow Their Lead

Last week, the European Central Bank (ECB) increased its key interest rate by 0.25 percentage points, to 2.25%. This is the first time the ECB raises interests since September 2023. The question that economists, investors, and others are asking is whether our own Fed will do the same when its Federal Open Market Committee meets and issues its report on June 17.

The short answer is that our central bank will not follow suit because there are differences between Europe and the United States that indicate a different response to a similar situation.

FOREIGN OIL DEPENDENCY

Europeans depend on foreign oil for their energy needs more than the United States. While the war-induced oil shortage is affecting everyone, the effect is somewhat less in the U. S.

LONG-TERM OUTLOOK

Europeans see the current rise in energy costs as lasting long past the current conflict. Apparently, there are other forces that will slow down any relief generated by the easing of tensions in the Middle East.

By contrast, in the U.S., we have been getting constant assurances by President Trump that the war will be over soon and as a result, inflation rates will “fall like a rock”.

PRESIDENTIAL PRESSURE

Long before the Iran crisis, President Trump had been pressuring former Fed Chairman Jerome Powell to lower interest rates, to stimulate the economy. In fact, the new Fed Chairman, Kevin Warsh, was chosen with the understanding that he would favor lower interest rates.

While the foregoing indicates a very low likelihood of an interest rate rise in the immediate future, the likelihood of a reduction is also pretty much off the table for the rest of the year.

The mandate that controls the behavior of the Federal Reserve System includes two opposing goals, namely promote full employment and keep inflation in check. If unemployment continues close to the ideal 4.0% and inflation continues substantially higher than the ideal 2.0%, the Fed may not be able to avoid raising rates before the end of the year, no matter how much that will irritate our president.