Published on Monday, March 21, 2022

Global | The Fed and the ECB, on course for normalization at different speeds

The main central banks have brought forward the withdrawal of their monetary stimulus measures (rolled out during the COVID-19 crisis) to anchor inflationary expectations, and are now inclined toward raising interest rates earlier, and possibly even faster, than expected.

Key points

  • Key points:
  • In response to the persistence of very high inflation (the YoY rate in February stood at 7.9%), an economy that has recovered to pre-pandemic levels and the rapid improvement in employment, the Fed will speed up the withdrawal of its stimulus measures.
  • Last week the Fed raised rates for the first time since 2018 and there will probably be up to six further interest rate rises this year and four in 2023. In the second half of 2022, there will be a gradual reduction in the size of the Fed's balance sheet — as it no longer reinvests the maturing bonds that it has acquired in recent years.
  • The ECB has raised its inflationary forecasts since the end of 2021, signaling a path toward monetary normalization. It ended last year by announcing that it would stop its pandemic emergency purchase program (PEPP) in March, and that its traditional asset purchase program (APP) would be reduced over the course of 2022.
  • In its March monetary policy meeting, the ECB announced a de facto monetary stimulus withdrawal, as it now intends to bring the APP to an end in the third quarter of 2022, and thereby continue to normalize its monetary policy.
  • However, we are currently in a complicated scenario, where the impact of the crisis in Ukraine could have a much greater effect on growth in Europe than in the US, which would lead to an increased decoupling of monetary policy on the two sides of the Atlantic.

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