The economy today

The Fed and the ECB to maneuver against inflation

Audio 04:22

European Central Bank President Christine Lagarde and US Federal Reserve Chairman Jerome Powell.

© Editing RFI - AFP - AP / Susan Walsh

By: Dominique Baillard Follow

4 mins

In the United States as in Europe, the central banks were on deck, this Wednesday, June 15, to try to subdue inflation.

With very different priorities on both sides of the Atlantic.

Advertising

The Federal Reserve (Fed) opted for the strong way by raising its key rates beyond what it had hinted at its previous meeting: 0.75% rate hike.

It's historic.

We had not seen such a rise for almost thirty years.

The European Central Bank (ECB) surprised investors by convening an emergency meeting to discuss, not inflation, but Italy's surge in interest rates.

Its ten-year loan exceeded the 4% mark and the spread with German rates reached the alarm threshold a few days ago.

A threshold that indicates a high risk of a debt crisis.

2022 suddenly has the flavor of 2012.

The latest figures indicate that inflation has exceeded 8% in the United States and Europe.

Yet central banks are not moving at the same pace.

What keeps them away in the reaction is the nature of this inflation, according to economist Julien Marcilly of GSA.

In the United States, inflation is generalized, with repercussions on wages, he continues.

It is therefore urgent to get toothpaste back in the tube, to lower prices, including by the most aggressive means.

► To read also: Expected decision of the Fed: "A big dilemma between growth on the one hand and inflation on the other"

While in the euro zone, “

 ”.

The euro zone is “ 

”, so the ECB has some time to raise rates, which it has promised to do from this summer .

Without haste, to avoid igniting the markets already panicked by the Italian risk.

Could a new debt crisis arise?

Even though Italy's debt has swelled further with Covid-19, the situation today is much better than ten years ago.

Because structural reforms have been carried out to guard against a new crisis in the banking sector.

But given the current climate of uncertainty, the ECB must reassure.

It therefore proposed, on June 15, to set up a new tool to manage the fragmentation of the euro zone, with on the one hand countries of the South which may still need its support.

And on the other, less indebted, richer countries that can absorb the future rate hikes on their own.

The European Central Bank will therefore act in a paradoxical way, underlines Julien Marcilly, by increasing rates on the one hand and buying assets on the markets on the other,

In Europe, Christine Lagarde's announcements relieved the markets

Italian rates eased and the spread with German rates narrowed.

But the game is not yet won.

The fact that the ECB remains vague on the outline of this new device dedicated to the countries of the South indicates that there are still disagreements between the member countries.

Disagreements that will have to be overcome as soon as possible.

► To read also: The ECB on the way to monetary tightening

In the United States, Wall Street reacted well to the Fed's announcements.

The stock market had in fact already anticipated this horse treatment.

It plunged in the days leading up to the Central Bank meeting to recover better after Jay Powell's announcements.

US markets are preparing for the worst, that is to say a slowdown in the economy.

US rates will exceed the 3% mark before the end of the year and continue to climb in 2023. What seriously cool the machine.

Can we eradicate inflation without falling into recession in Europe?

The maneuver is perilous, but Europe now seems able to avoid this pitfall.

There was no recession in the second quarter and household confidence remains rather high.

The fate of the economy partly depends on future wage increases.

And the reaction of households.

How are they going to withstand the shock of inflation which devours their purchasing power?

According to Julien Marcilly, if the wealthiest draw on the savings accumulated during the covid, this could significantly limit the damage.

► IN BRIEF

In Tunisia, the public sector is on strike today at the call of the UGTT, the main trade union in the country.

A strike to obtain salary increases taking into account inflation.

This movement puts pressure on President Saied, who is currently in discussion with the IMF.

Tunisia, in political and financial crisis, needs an extension to get back on its feet.

Newsletter

Receive all the international news directly in your mailbox

I subscribe

Follow all the international news by downloading the RFI application

google-play-badge_EN

• Economy

• United States

• finance

• ECB