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The Federal Reserve on Wednesday is widely expected to hold interest rates steady for the fourth meeting in a row, while the European Central Bank just lowered its rates for the eighth time in a year.
The divide has caught the attention of President Trump, who has seized on the gap as he pushes the Fed to lower rates by a full percentage point. He did so again last week as he called central bank chairman Jerome Powell a "numbskull" who has refused to ease policy despite Europe dropping its rates "10 times."
"We’ve done none," Trump added. "Nobody understands.”
The two central banks in the US and Europe have diverged as their respective economies move in different directions, impacted not just by tariffs from the Trump administration but other domestic factors.
Earlier this month the ECB cut its benchmark interest rate to 2% from 2.25%, the lowest level since early 2023, leaving borrowing costs now more than 2 percentage points lower in Europe than the US. It also signaled it is nearing the end of its rate-cutting cycle.
The Fed last cut rates in December 2024, reaching a target range of 4.25%-4.5%, and has yet to cut rates during Trump's second term in office.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
“The president is going to keep getting more and more upset about it,” said Wilmington Trust chief economist Luke Tilley.
Perhaps the major difference is how the two central banks are viewing inflation. Policymakers in the US hiked their inflation forecasts in the spring as they worried about the ultimate impact of Trump's tariffs on prices — even though the higher expected prices haven't arrived yet. The Fed will offer new forecasts this coming week.
In Europe, by contrast, the ECB has been cutting its inflation forecasts and now expects inflation to fall to its target of 2% this year before falling further to 1.6% next year.
“The European Union is cutting because inflation is low and there's a threat to growth," Tilley said. "I say the Fed either should be or will be cutting because inflation is low and there's a threat to growth, but they're holding on a little bit here.”
Jeffrey Roach, chief economist for LPL Financial, said the Fed is more likely to remain in “wait-and-see” mode than the ECB because US consumers are on stronger footing than their European counterparts, giving the Fed the luxury of time before US policymakers have to act.
"Relatively stronger consumer demand means US inflation is running a bit hotter than the Euro area," said Roach. "As growth prospects look weaker in the Euro area, the ECB is becoming more dovish as they respond to economic pressures in Europe."
