- Fed Chairman Powell and ECB President Lagarde will discuss monetary policy at the ECB Forum on Central Banking.
- Comments on monetary policy divergence between the Fed and the ECB could trigger a market reaction.
- Investors see a less than 40% probability of the Fed leaving the interest rate unchanged in September.
Jerome Powell, Chairman of the Federal Reserve System (Fed), and Christine Lagarde, European Central Bank (ECB) President, will attend a monetary policy panel at the 2024 ECB Forum on Central Banking in Sintra on Tuesday, July 2. The panel will be moderated by CNBC Anchor Sara Eisen.
Fed and ECB policy divergence
The Fed left its policy rate unchanged at the range of 5.25%-5.5% following the June policy meeting, and it’s widely expected to stand pat on policy in July. In the post-meeting press conference, Chairman Powell noted that they need to see more good data to bolster their confidence on inflation moving toward the 2% target before considering a policy pivot.
On the other hand, the ECB announced on June 6 that it lowered key rates by 25 basis points, citing improving dynamics of underlying inflation and the strength of the monetary policy transmission.
Both central banks, however, noted that they will remain data-dependent and take policy decisions on a meeting-by-meeting basis.
The latest decisions by the Fed and the ECB point to diverging monetary policy. Investors will scrutinize comments on interest rate outlook, inflation expectations and growth prospects to see whether the policy gap could widen in the near-to-medium term.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
