Editorial | The US central bank works while the ECB is still floundering

AThe most important decision of the year that will sway the world's real economy and monetary policy will be made in the United States.

When the US central bank, the Fed, lowers key interest rates, the decision is the starting shot for this year's stock market and all other central banks. Global money flows are flowing and likely heading towards the dollar. A currency that has once again proven to be the strongest and most reliable.

The complete economic supremacy of the United States has become increasingly apparent over the past few years. The United States revived itself out of the corona pandemic by spending money briskly and acting quickly. The country's economy sank into the throes of inflation, but also quickly bounced back to the surface.

Europe acted as usual: more diluted and slower. The support package intended for the aftercare of the corona pandemic was pushed back and forth and the terms were tweaked so that they would be politically acceptable everywhere. The uses of the money from the recovery package are still being clarified and the eligibility of the projects offered as funding targets is being measured. The money is now directed to green transition projects, after Korona was allowed to fade after a long reflection period.

YThe United States also takes the lead in green transition projects. It was already giving subsidies to climate-friendly companies and attracting them to the United States, while Europe was still figuring out what to do and how to respond to the United States.

The United States sovereignly shows the direction of global money flows as well. The country's central bank brought inflation under control surprisingly quickly by raising the key interest rate and without causing a recession. The Fed was able to announce before the European Central Bank that the era of raising interest rates is over.

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Europe will follow.

In terms of the global change in monetary policy, it is essential how quickly the U.S. moves in a lighter direction. Europe will follow. But catch up anyway.

The European Central Bank's timing and sizing problems are worse than the Fed's. The Fed's interest rate hike moves with much less friction to revive the real economy than the ECB's decisions in Europe. The Eurozone is indeed showing itself to be an imperfect currency area.

EGermany, the largest in the Uro region, is in dire financial straits, as is tiny Finland. Easing monetary policy will not eliminate the problems of both countries, the faults are much deeper. However, both countries would already need to calculate the key interest rates. Not all euro countries. The pace of growth is also very different in different parts of Europe.

The national assets of Finnish households are largely confined to apartments.

The lowering of interest rates starting in the United States will certainly stimulate the housing trade, but probably much more slowly than the estimates of brokers and banks – which are somewhat conservative – suggest. In any case, the recovery will come more slowly than was believed back in the fall, when the most recent economic forecasts for the year 2024 were drawn up.

Before making interest rate decisions, the ECB will look at how wages have risen in different parts of Europe. This information will be sufficient for decision-making, perhaps in the spring. With this schedule, the key interest rate would probably decrease in early summer, and the effects of the solution would only start to be felt after many months. Financial conditions would become easier, but the change would hardly result in an acceleration of housing sales and a visible rise in prices than perhaps at the end of the year. However, the interest rate alignment would be a positive signal for new construction.

The Finnish economy will continue to go deeper and deeper into recession for at least the duration of the ECB's wage monitoring period. Unemployment has already started to grow. In such a situation, the housing market will not freeze. But somewhere far beyond the Atlantic, the warming sun is about to rise.

The editorials are HS's positions on a current topic. The articles are prepared by HS's editorial department, and they reflect the magazine principle line.