Wall Street has been waiting all year for lower interest rates and later this week, it will probably get them. There’s just one problem: Those lower rates will be in Europe, not the United States.

The European Central Bank on Thursday is almost certain to lower its benchmark interest rate for the first time in nearly five years. The move will come as the Federal Reserve remains on hold with plans to trim U.S. borrowing costs, amid inflation that is proving more stubborn than anticipated

The ECB’s expected action this week is noteworthy because the Fed, the central bank for the world’s largest economy, usually leads interest rate cycles. When inflation rose as the global economy emerged from the pandemic, the Fed began raising rates in March 2022 four months before European policymakers acted.

“It is very unusual that the European Central Bank would move ahead of the Federal Reserve. Typically, the Fed is the leader and then other central banks follow,” said Kathy Bostjancic, chief economist for Nationwide.


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A decision by a major central bank to lower interest rates, making it less expensive to borrow money to buy a home or car, would signal a turning point in the fight against higher prices that has preoccupied monetary policy officials for more than two years. A rate cut also would probably boost stock prices, in part by lifting corporate earnings.

Wall Street began the year expecting the Fed to cut rates seven times in 2024, according to futures markets. But after seeming to be under control, the consumer price index unexpectedly reaccelerated earlier this year. At an annual rate of 3.4 percent in April, prices are still rising faster than the Fed’s 2 percent target for price stability.

Government spending in the United States is probably contributing to upward pressure on rates. A larger federal budget deficit in 2023 — the result of lower tax revenue and higher spending on industrial policies — is effectively making it harder for the Fed to lower borrowing costs, according to International Monetary Fund calculations.

“We have emphasized many times that this fiscal policy puts pressure on policy rates. It puts pressure on long-term rates. It affects costs of funding everywhere in the world,” Vitor Gaspar, director of the fund’s fiscal affairs department, said in April.

As a result, investors now expect the Fed to cut rates just once this year, probably in September, according to the CME FedWatch Tool, which tracks market sentiment.

On Friday, the government said the Fed’s preferred inflation gauge — the personal consumption expenditures price index — was 2.7 percent higher in April than one year earlier and unchanged from March. The core PCE reading, which excludes volatile food and energy prices, rose 2.8 percent over the past 12 months.

Those figures are now roughly half their 2022 peaks, but remain above the Fed’s target.

This week’s ECB rate cut is not expected to affect Fed officials, who remain focused on conditions in the United States. One sign of continued U.S. economic strength is the labor market; the unemployment rate has been below 4 percent for more than two years, the longest such stretch in 50 years.

Fed officials have signaled patience in recent comments. On Thursday, John Williams, president of the Federal Reserve Bank of New York, said he expects inflation to continue falling and does not feel “any urgency” to lower rates.

Still, some investors worry the Fed may be waiting too long.

Higher rates already have cooled the housing sector. But the parts of the economy where prices continue to rise too quickly, such as the insurance market, are not sensitive to interest rates. And May’s payrolls gain was the lowest since November.

“We do see some pockets of weakness in the labor market and we think it will become more obvious over the next three months,” said David Page, head of macroeconomic research at AXA Investment Managers in London.

In Europe, circumstances are different. Higher energy costs resulting from Russia’s invasion of Ukraine drove the initial surge in inflation, but faded. The annual rate of price increases peaked at 10.6 percent in October 2022, higher than the top U.S. reading of 9 percent earlier that year.

The latest European inflation numbers released Friday show a slight uptick in May to an annualized 2.6 percent rate from 2.4 percent a month earlier. But policymakers, who have been talking of a coming rate cut, are likely to view that as “noise around a declining trend,” economist Carl Weinberg of High Frequency Economics wrote in a client note.

The ECB is more concerned about economic weakness. While the U.S. economy has proved surprisingly strong, the 20-nation euro zone lost momentum in the second half of 2023.

The ECB’s latest forecast calls for the economy to expand by just 0.6 percent this year. The continent’s economic outlook remains glum: 69 percent of chief economists said growth will be “weak” or “very weak” for the remainder of the year in a new World Economic Forum survey.

If they do cut rates later this week, European officials are likely to wait until the fall to act again.

“The ECB will cut first, but they’re not going to get too far ahead in the game,” said Marc Chandler, chief market strategist for Bannockburn Global Forex in New York.

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