Fed Set to Cut Rates Despite Inflation as ECB Holds Steady

The Federal Reserve is preparing to lower interest rates at its September meeting, even as U.S. inflation remains above target. Across the Atlantic, the European Central Bank is holding steady, convinced eurozone inflation is moderating. The split underscores diverging approaches between Washington and Frankfurt, with US SPX 500 (Zorrox: SPX500.) and euro vs US Dollar (Zorrox: EURUSD) already reflecting the policy gap.

Fed Faces Conflicting Signals

U.S. inflation climbed to 2.9% in August, with core holding at 3.1%—still above the Fed’s 2% goal. Yet payroll growth slowed and unemployment hit its highest since 2021.

For policymakers, the trade-off is clear: allow tighter credit to worsen labor weakness or cut rates at the risk of prolonged inflation. Markets widely expect a 25 basis-point cut, with talk of more easing if growth falters further.

Inflation Composition Adds Complexity

Price pressures are uneven. Shelter keeps rising, services costs remain sticky, and tariff-hit categories such as vehicles and apparel are seeing clear pass-through. Gasoline added volatility in August. Goods outside tariff-sensitive sectors cooled modestly but not enough to offset broader stickiness.

This mix complicates the Fed’s task. Rate cuts can ease financing but cannot offset supply shocks or tariffs, raising the risk of renewed inflation.

ECB Keeps Rates Unchanged

The ECB, by contrast, held its deposit rate at 2%, extending several months of calm. Eurozone inflation printed 2.1% in August, at target, with forecasts pointing slightly below 2% by 2027.

President Christine Lagarde described the bloc as stable, with price pressures contained and growth holding. For the Governing Council, the risk of undershooting is now as important as overshooting, justifying patience even as political and fiscal risks remain in members like France.

Diverging Policy Paths

The contrast underscores different priorities: the Fed leaning toward labor support despite inflation, the ECB in wait-and-see mode.

This divergence has global consequences. A Fed cut could weaken the dollar, while an ECB hold supports the euro—though Europe’s fiscal strains may cap gains. Bond markets remain volatile, with spreads reflecting diverging paths.

Tips for Traders

• US SPX 500 (Zorrox: SPX500.) is a key risk gauge; watch equity reactions as cuts are priced in.

• Euro vs US Dollar (Zorrox: EURUSD) will be the clearest FX expression of policy divergence.

• Focus on U.S. inflation components like shelter and services, which guide the Fed’s next steps.

• Track European bond spreads for signs of stress as fiscal risks resurface.

• Rate-sensitive U.S. sectors such as real estate and financials may behave differently from European equities under divergence.