Central Banks
ECB
Mme LaGarde is convinced that the Eurozone recovery is happening and will accelerate as inflation falls and real incomes rise. Real income will rise because wage increases will fall but more slowly than inflation (all a bit too neat for me!). She thinks that service sector inflation of 4% will decline as wages fall. Together this means the ECB will hit its 2% target this year. Clearly 25bp cut per meeting are baked in the cake. The more so as I don't buy the recovery story just because we have had an end of year blip in the PMIs telling us that things are not falling of bed quite as fast as before. . I can't see why the masses will simply not go on saving instead of spending..
There is nothing in ECB thinking about President Trump's policies. The Governing Council cannot form a view of this without possessing the facts. So no scenario forecasting or strategic thinking
Mme Lagarde was almost dismissive of a question on how far rates could fall and where the r* (neutral interest rate) was that would mark the bottom. She resorted to the "we are data driven" mantra and said that rates are so much higher than the neutral rate that we do't have to even think about it now. I'd say the r*. in the Eurozone is around 1.5% compared to 4% in the US.
And no- Bitcoin et al are not going to be included in international reserves of the ESCB!!
The Fed.
Apart from the Fed's noteworthy demonstration of independence by announcing it was quitting the international Network of Central Banks and Supervisors for Greening the Financial System (NGFS) (membership: 140 world central banks) a few days before the inauguration of President Trump, there was something interesting in the FOMC statement:
"The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated." which is less dovish than the previous "labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.".
But this was played down by Chair Powell at the Press Conference as merely tidying up the language!!!!
Nevertheless it does speak to at most one more cut before tariffs and budget deficits force a reverse in Fed policy before the end of the year. President Trump's policies will see to that.
Talking of tariffs! a lot is being made of the internal Fed debate (the last time round in 2018) to ignore tariffs as a one off price adjustment. This made some sense back then as of course tariffs only start an inflationary process if they heft inflation expectations. Back in 2018 inflation had been running at or below the Fed's 2% target for a long time. So inflation expectations were "firmly anchored". Not so today. That is why the Fed will not be able to ignore tariffs unless it runs chicken as it just did on the NGFS. There are many ways to undermine Central Bank independence. Fear is one of them.