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CROSS ASSET WEEKLY
23.07.2021

Fed and ECB Operate On Different Timelines

Summary
Cross asset weekly pic
We expect that the FOMC meeting next week is unlikely to provoke the same market reaction as last month’s meeting. No new projections (dot plots) will be published and it is too early for a stronger tapering announcement. However, President Powell might also argue that the Fed should be able to assess over the coming months whether it is on track to achieve the taper threshold. Consequently, we expect a strong signal at the September FOMC meeting and the official taper announcement in December. The actual reduction of asset purchases should start early next year and last until September. The lift-off in rates will likely take place in March 2023.
The ECB on the other hand has delivered a very dovish message by strengthening its forward guidance on interest rates. The lift-off in rates is now tied to three explicit conditions – anchoring inflation expectations firmly at the new symmetric 2% inflation target. Given the muted inflation outlook, this implies no rise in policy rates over the next 3 years. The ECB has signaled a clear commitment to maintain a highly accommodative monetary policy for an extended period. This also implies that asset purchases will be maintained at a rapid pace in 2022 and probably beyond.

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