What decisions will Powell and Lagarde make this week?

Christine Lagarde, president of the ECB, and Jerome Powell, his counterpart at the FED.  Photo: ECB

Once the market has finished the US rate hike cycle, The key for the next meetings will be the messages transmitted by the Federal Reserve (FED) regarding the growth and inflation forecasts.. On November 21, in the publication of the minutes referring to the last meeting, a clear consensus can be seen about the need to proceed with caution and base monetary policy decisions on economic variables that we know.

Thus, despite the good data on prices, and the strength of the growth indicators shown by the North American economy, A consolidation of inflation data for the coming months is needed before the Federal Reserve risks lowering rates, which could cause us to lose the ground we have gained so far. In this way, we believe that it will be difficult to see a downward movement in rates before the second half of 2024.

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Over the past few weeks, better than expected price data has led investors to expect a change in tone from the European Central Bank (ECB).assuming that not only will we not see any further increase in the rate of intervention, but that the first drop will occur much earlier than expected until recently.

Christine Lagarde, President Of The Ecb, And Jerome Powell, His Counterpart At The Fed.  Photo: Ecb
Different statements by different members of the ECB do not help to clarify the perspective of the future actions of the organization.. While the president of the ECB tried to cool the expectations of investors, insisting that uncertainties about the inflationary drift in the medium term remain high and that it is too early to claim victory. In recent days we have seen statements from members like Schnabel who believe that given the known price data, further rate increases are not necessary. In any case, there is a long way from the conclusion of the immediate decline.

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In our opinion, the market is too aggressive in terms of starting a decline. While it is true that the price data has improved, the current level of liquidity in the system, although decreasing, is still very high, and the ECB is fully aware of this. In this way, it is difficult for us to see a reduction in the intervention rate before the second half of 2024, as long as the growth data does not experience an aggressive drop and force Lagarde to deviate from the script she planned .

Another element that must be paid attention to in this meeting is the possible change in the path of reinvestment in the still existing purchase programs., and a hypothetical announcement of an increase in the minimum liquidity reserve for financial entities. This is something that the market has been thinking about for a long time and may have a significant impact on the liquidity of the system.

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