Fed-ECB: 2025, the great decoupling?

The year 2024 was marked by further progress in disinflation in both the United States and the Eurozone, sufficient to pave the way for rate cuts. The Fed and the ECB did not quite follow the same timetable and tempo, but by the end of the year, the cumulative size of their rate cuts is the same: 100 basis points. At least, if the Fed makes the expected final 25 basis points cut at the December FOMC meeting.

However, 2025 may be quite different from 2024, partly because of the potential impact of Donald Trump's economic platform. What will be decided and in what timing remains uncertain. But in our new forecasts, we assumed almost full implementation over time.

In this context, we expect, on the one hand, a start to convergence of growth rates between the US and the Eurozone, and, on the other hand, divergent inflation trajectories and therefore a decoupling of monetary policies.

In terms of growth, the reduction of the gap between the US and the Eurozone would be achieved primarily through the anticipated decline in US growth.

Admittedly, this latter would initially continue to be strong, supported by post-election optimism over about the first half of 2025, before starting to suffer from the inflationary effects of ‘Trumponomics’ and the resulting more restrictive monetary policy.

More precisely, we now expect the Fed to maintain a prolonged monetary status quo throughout 2025. The Fed was already not in a hurry to deliver more rate cuts, but we now believe that it will have to stop them in 2025, as it cannot look through a tariff-driven, even if temporary, pick-up in inflation.

The Fed is indeed likely to be more sensitive to the risk of a de-anchoring of inflation expectations rather than to downside risks to growth.

On the Eurozone side, the expected strengthening of growth should remain limited and constrained by an increased number of headwinds, partly neutralising the existing tailwinds. But on the other hand, the inflation outlook remains positive. The return to the 2% inflation target is expected to be secured in 2025, as the disinflationary pressures should outweigh the inflationary ones.

All of this should allow the ECB to continue its gradual pace of rate cuts until neutrality in the middle of next year.

What message does this anticipated decoupling between the Fed and the ECB monetary policy send?

Of course, it is partly the result of a better economic situation in the United States, but it is also, and above all, the result of lower and controlled inflation in the Eurozone, a significant advantage.

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