Despite maintaining its rate-cut and inflation outlooks, ECB President Christine Lagarde's news conference on Thursday focused on how far the euro zone's monetary policy could differ from the Fed if U.S. inflation persists. Other central bankers stated that a prolonged U.S. inflation war would limit their options.
"It's not just about whether the Fed can decide to act in June or a bit later, it's the entire monetary policy for maybe a year that is under question," Per Jansson, deputy governor of Sweden's Riksbank, told reporters.
That's not standard. Last March, the Fed's economic estimates showed no policymakers expected to raise the benchmark overnight interest rate above the 5.25%-5.50% range, where it has been since July.
However, minutes of the Fed's March 19-20 policy meeting showed that "some participants" said financial conditions may not be as tight as suspected, "which could add momentum to aggregate demand and put upward pressure on inflation," which could support higher rates.
Strong growth in the face of the highest policy rate in a quarter of a century has raised questions for the Fed and the global economy about whether monetary policy is just slow to take effect, with a U.S. nosedive coming, or whether labor participation and productivity have improved.
On the basis of increased immigration and worker productivity, the U.S. Congressional Budget Office revised its projection for economic expansion without inflation.
Fed officials have admitted that both dynamics helped slow price increases last year at an unexpectedly quick rate, resulting in "immaculate disinflation"—but it's unclear how deep that well runs. If the economy is too robust or financial conditions too lax to return inflation to the Fed's target, the U.S. divergence may become a tight-money drag.
She expects tighter policy will "take the edge off" demand and weaken the U.S. economy, but continued inflation will lead to worse results. "It's really a 'soft landing' forecast ... but I do think the risks of recession are somewhat elevated in the United States and other countries," stated.
Follow for more updates