As global markets eagerly await the next interest rate decisions from the Federal Reserve (Fed) and the European Central Bank (ECB), Ruslan Lienkha, Chief of Markets at the prominent fintech platform YouHodler, provides valuable insights into their possible actions both in the immediate term and throughout the year.
US Federal Reserve: Caution Amid High Borrowing Costs
According to Lienka, the US Federal Reserve faces a delicate balancing act when it comes to interest rates. While some experts have called for rate hikes to curb inflation, Lienka takes a more cautious stance. “I don’t see any necessity to increase rates at the moment,” he comments, asserting that such a move could inadvertently lead to a recession by imposing additional pressure on businesses.
Lienka argues that maintaining current interest rates can instill positive expectations in the market, serving as a potent driver for the economy amid already high borrowing costs. However, he acknowledges that future rate changes will be contingent on the trajectory of inflation. If inflation slows down or remains within manageable levels, the Fed might pause rate hikes. But, if a sudden surge in inflation, reaching 5-6%, occurs, further rate increases might become inevitable.
The lurking concern lies in the massive non-financial corporations’ debt in the US, which amounts to a staggering $18 trillion. While there are notable successes in the banking sector, mounting difficulties in servicing debt across various industries raise alarm bells. The uncertainty surrounding the next economic crisis is a clear warning sign that demands careful attention from policymakers.
European Central Bank: Navigating Economic Headwinds
The European Central Bank, in contrast, faces a different set of challenges. Lienka believes that the ECB will have no choice but to increase interest rates due to inflationary pressures. The economies of major EU countries, including Germany, France, and Italy, are slowing down, and production is shrinking, leading to an alarming rise in defaults. The full implications of these economic headwinds are expected to unfold in the coming years.
The ECB’s approach to rate changes will closely track the inflation trajectory, with a focus on stabilizing inflation below the borrowing cost level. Lienka maintains that pausing rate hikes is not an option, as unchecked high inflation could lead to more significant damage and ultimately push the economy into a recession. Drawing on the failed experiments of other countries, such as Turkey, the expert emphasizes the necessity of higher borrowing costs than the inflation level to effectively combat inflation.
The most significant warning sign in the EU economy is that several member countries have already slipped into recession while grappling with persistently high inflation rates. This complicates the ECB’s efforts to navigate its monetary policies for a diverse range of countries with distinct cultures, languages, and economies.
Comparative Outlook: Fed’s Precision vs. ECB’s Unique Challenges
Lienka draws attention to the divergent paths of the two central banks. He notes that the Fed seems to be performing better in the current scenario, mainly due to its more precise timing in rate hike decisions. Nevertheless, he advises that assessing the full impact of their actions will require several years.
One of the unique challenges facing the ECB is managing monetary policies for a diverse group of countries with distinct economic landscapes. In contrast, the Fed wields influence over the entire global economy, with its decisions reverberating worldwide.
As markets brace themselves for the central banks’ next moves, it is evident that both the Fed and the ECB are navigating intricate economic landscapes. The decisions they make in the coming weeks and months will have far-reaching implications, not only for their respective regions but also for the global financial ecosystem.