December 03, 2021

Fed Versus ECB

This chart shows the preferred price measures of the Fed and ECB. The Fed targets the PCE deflator, whereas the ECB focuses on the harmonized index of consumer prices (HICP). Based on these price indices, inflation rates in the two economies have been largely identical for the last two decades. Currently, U.S. inflation is running at 5.0% versus 4.9% in the eurozone.

Despite very similar inflation rates, there is a chasm in the market’s outlook for central bank policies. Interest rate futures are pricing an early and rapid tightening from the Fed, while the ECB is expected to be slow and measured.

Will there be some convergence in the expected path for Fed and ECB policy rates? What will be the investment implications?

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