Markets hoping for a long-term gap between ECB and Fed policy are going to be disappointed. Isabel Schnabel, a top policymaker at the ECB, made it very clear on Saturday that there won’t be a lasting divergence in strategy between Europe and the U.S.
Schnable’s words came during the 31st Dubrovnik Economic Conference, where she called current market speculation misleading. “I would not expect a sustained decoupling,” she said, adding that the idea of a split is not backed by actual market pricing.
Schnabel said the trade war between the U.S. and China is acting like a global shock that hits both demand and supply worldwide. “We can discuss which of the two effects on inflation is larger because that determines the net effect,” she added. But either way, she shut down the idea of long-term separation.
Fed stays on pause while ECB slashes rates
Both the ECB and the Fed hiked rates aggressively through 2021 and 2022 as inflation went wild after the pandemic. In 2024, they started cutting. But here’s where things split — or at least looked like they did.
The ECB has already cut rates eight times. The most recent cut happened on Thursday, bringing its key rate down from 4% to 2%. Meanwhile, the Fed hasn’t touched its rates since December 2024, keeping the federal funds rate steady at 4.25% to 4.5%.
Still, Schnabel pushed back on the idea that this temporary gap means anything long-term. Fed officials will meet again June 17–18 in Washington, and most expect no changes.
They’re waiting to see what direction Donald Trump’s administration goes with trade, taxes, and immigration. Nobody at the Fed wants to move before they know what kind of economic shock Trump’s policies might bring.
Inflation in both the U.S. and Europe took off after the pandemic and peaked around the middle of 2022. Then, it cooled down at almost the same time in both places. This is exactly why Schnabel and others inside the ECB say inflation is now a global issue, not a local one.
Trump’s trade moves split inflation paths
But recently, inflation trends started drifting apart. U.S. inflation stayed sticky. In contrast, eurozone inflation dropped below the ECB’s 2% target in May, coming in at 1.9%, and it’s now expected to average just 1.6% in 2026.
Trump’s new tariffs could push U.S. prices up, while in Europe they might actually drive prices down. Why? A few things. The dollar is weaker, global demand is slowing, and Asian exports that can’t go to America will likely get dumped in Europe at lower prices.
Schnabel acknowledged the theory: “If China can no longer export to the United States, they’re going to flood the rest of the world and especially Europe with cheap goods — and that could then lead to high inflation in the U.S. and low inflation in Europe.” But she dismissed it as not a big deal. “This effect is actually quantitatively quite small.”
And even if that did become a real threat, Schnabel said Europe would hit back. “You can be sure that there would be counteracting measures coming from the European Commission.” Her bottom line? “This is not an argument for divergence.”
ECB President Christine Lagarde backed this up last Thursday. She said rate cuts are almost done. “We’re in a good position,” she told reporters, hinting that most of the heavy lifting is already finished. Internally, some officials now believe that 2% could be the final rate.
Even Yannis Stournaras, one of the most dovish members of the ECB, told Bloomberg on Friday that “the bar for another rate cut is high.” According to him, it would take “big downward surprises” in growth or inflation to push rates any lower.
Inflation is falling faster than expected. That 1.9% reading in May was a surprise. Forecasts now show it averaging 1.6% in 2026 before climbing back to 2% in 2027.
Europe’s economy grew 0.6% in the first quarter of 2025, as exports from countries like Ireland and Germany surged ahead of expected U.S. tariffs. The concern now is that this short-term boost could fade fast in the coming quarters.
Schnabel also pointed out that while the recent drop in inflation was mostly because of falling energy prices, she’s seeing deeper shifts. “We do see that also the more persistent components are coming down,” she said. Still, she admitted not everything is fixed.
“Wage growth is still too high, service inflation is still relatively high, and domestic inflation is generally high,” Schnabel said. But she added, “Our confidence is there that kind of the past shocks are now fading and that we are in a good place on that.”
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