Those hoping for a lasting split between the monetary paths of the Federal Reserve and the European Central Bank may want to curb their enthusiasm. According to ECB Executive Board member Isabel Schnabel, such divergence is more mirage than material.
“I expect this trade conflict to generate a global shock that hits both supply and demand. One can debate which side dominates in terms of inflation since that’s what drives the net effect,” the ever-measured German policymaker remarked at the Dubrovnik Economic Conference.
“But in any case,” she continued, “I don’t anticipate any meaningful decoupling.” Market prices, apparently, concur.
Both central banks hiked in lockstep as inflation erupted post-pandemic in 2021–22, and both began easing in 2024. But while Frankfurt has slashed rates eight times — from 4% to 2%, with its latest cut just this past Thursday — the Fed has been on an extended coffee break since December 2024. The federal funds rate remains lodged at 4.25%–4.5% as Chair Powell and company await clarity on what Trump 2.0 might do with trade, immigration, and taxes.
Despite differing growth trajectories, inflation in the US and the eurozone surged and peaked almost simultaneously in mid-2022. Since then, things have diverged. Euro-area inflation has dipped below the ECB’s 2% target — coming in at 1.9% in May and projected to average just 1.6% in 2026. In contrast, inflation in the US remains stickier, likely to be inflamed further by President Trump’s tariff-happy second act.
Trump’s trade policy may, paradoxically, disinflate Europe. Why? A weak dollar, sagging global demand, and a rerouting of cheap Asian exports away from the US. Schnabel described the idea of China flooding Europe with bargain goods as “quantitatively rather mild.” And if it isn’t, she added dryly, “you can be sure the European Commission will be brandishing its own trade measures.”
So much for sustained divergence.
Meanwhile, ECB President Christine Lagarde declared last week that the rate-cutting campaign is nearing its final act. The ECB, she claims, is “in a good position” to face upcoming uncertainties — which, in central bank parlance, roughly translates to “we hope we didn’t overdo it.”
Some policymakers now believe borrowing costs may have reached their “terminal level.” Greece’s Yannis Stournaras — no hawk by any stretch — said that “the bar for further cuts is high” and that it would take “major downside surprises” in growth and inflation to justify more action.
Recent forecasts reflect this caution: inflation is expected to remain below target in 2026 (1.6%) before returning to 2% in 2027. The eurozone economy grew by 0.6% in early 2025, buoyed temporarily by export rushes from Ireland and Germany ahead of looming US tariffs, but this artificial lift is unlikely to last.
Schnabel, one of the ECB’s more hawkish minds, insisted progress is being made — albeit with a caveat: “Energy prices largely drove the latest reading,” she admitted. “But we’re also seeing easing in more persistent components.”
Still, domestic inflation remains “relatively high,” she noted, and wage growth “too elevated.” In short, the ECB is feeling quietly confident that past shocks are fading — though one suspects they’re saying that with fingers crossed behind their backs.