US FEDERAL RESERVE: Despite Falling Inflation - Fed Takes Time with Rate Change!

US FEDERAL RESERVE: Despite Falling Inflation - Fed Takes Time with Rate Change!
The stock market remains volatile as the US federal funds rate stands at its highest level in over 20 years. While the European Central Bank (ECB) has already initiated rate cuts, the US Federal Reserve, led by Jerome Powell, has kept the key interest rate between 5.25% and 5.5%. Only one rate cut is expected for 2024, although three cuts were planned in March. Despite an encouraging drop in the inflation rate to 3.3% in May, Powell demands more positive data to confirm a sustainable downward trend towards the 2% target.
Johannes Mayer, chief economist at EIB, explained that the Fed has become more cautious due to previous unexpected inflation increases. The Fed now signals only one rate cut for this year, depending on further economic and inflation developments. Mayer expects inflation to decline slowly and gradually, estimating that it might reach the Fed's 2% target by the end of 2025.
The ECB operates independently from the Fed and has leeway up to an interest rate difference of about 2%. Initially, monetary policy's dominance in financial markets might decrease, which could be positive. However, investors should always be prepared for surprises, as central bank policy only affects the economy and inflation when it diverges from market expectations.
In Germany, the federal government anticipates new economic stimuli from the upcoming European Football Championship. Retail, gastronomy, and accommodation sectors could benefit. Tesla shareholders are set to vote on a $56 billion compensation package for Elon Musk and a potential relocation of the company's headquarters to Texas. The Dow Jones fell by 0.6%, while the DAX dropped by 2%, influenced by weak economic data and concerns over tariffs on Chinese electric vehicles.