ZEW Economist Friedrich Heinemann on Fed’s Interest Rate Decision

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12.06.2024

“The USA and Eurozone Are Drifting Further Apart in Terms of Monetary Policy” (June 2024)

Picture of the ZEW economist Friedrich Heinemann — Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at ZEW, comments on the Fed’s interest rate decision and the US economy.

Tonight the Fed will make a decision on key interest rates. It is expected that the rates will remain unchanged. Friedrich Heinemann, head of ZEW Mannheim’s “Corporate Taxation and Public Finance” Research Unit and professor at Heidelberg University, has commented on the upcoming decision:

“The once again surprisingly strong US labour market data for May has taken the wind out of the sails of proponents of a rapid interest rate turnaround. The path back to price stability is difficult for an economy as dynamic as that of the US. In addition, the continued restrictive monetary policy is being offset by a continually expansive fiscal policy. Despite the upswing, the current budget deficit still stands at a staggering six per cent. The US will therefore continue to get along well with the high interest rates and may even need them to prevent the economy from overheating. The eurozone and the US are thus drifting further apart in terms of monetary policy, which is not particularly surprising. The right kind of monetary policy for a highly regulated, anaemic economy in an ageing Europe looks different from that of the United States, which is more focused on growth and less on redistribution.”

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“Fed and ECB Are Increasingly Diverging” (March 2024)

The US Federal Reserve decided to keep its benchmark rate unchanged within its current range of 5.25 to 5.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, had the following to say on the matter:

“While a first interest rate cut by the ECB in June seems highly likely, doubts are mounting over the Fed’s readiness for an imminent move. The US inflation rate proves unexpectedly persistent. After a rapid decline until June last year, it has since plateaued at around three per cent. This starkly contrasts with the eurozone, where the descent towards a two per cent inflation rate continues steadily. Moreover, the outlook for the US economy is significantly more favourable than for the sluggish eurozone economy. As a result, the Fed and ECB are increasingly diverging in their monetary policy decisions. Europe could lead the way in interest rate cuts. However, this isn’t good news for the eurozone, as it ultimately reflects the structural weakness of the European economy compared to the US.”

“Fed Relaxed Thanks to Growing Economic Optimism” (January 2024)

The US Federal Reserve decided to keep its benchmark rate unchanged within its current range of 5.25 to 5.5 per cent. Friedrich Heinemann, head of the Research Unit “Corporate Taxation and Public Finance” at ZEW Mannheim and professor at Heidelberg University, has commented on this matter:

“The US consumers, buoyed by a robust job market, are feeling more optimistic. Consequently, the US economy has weathered the Federal Reserve’s aggressive interest rate hike policy without a hard landing. This is why the Federal Open Market Committee has no urgency for initial interest rate cuts. The economy is managing well with the current interest rates, and inflation has even risen again in December. This scenario does not call for swift and substantial interest rate reductions.”