Europe suddenly looks appealing amid Trump's policy instability
Last Thursday, US president Donald Trump launched a broadside against the chairman of the Federal Reserve, Jay Powell.
Amidst all the gloom, doom, and intense uncertainty permeating the world now, Irish borrowers got a piece of good news last week. The ECB delivered the seventh interest rate cut since June 2024, and the good news is that there is more to come.
The ECB pointed out on Thursday that inflation is on track to return sustainably to its targeted 2% level; service sector inflation is easing; wage growth is moderating; firms are absorbing cost pressures; and most importantly the risks to growth from global trade tensions are intensifying.
Interpreting the language of central bankers is always a challenge, but to me it seems clear that the ECB is telling us that it believes that interest rates have a lot further to fall over the coming months.
Some have had the view that, as tariffs directly increase the price of imported goods and feed directly into imported inflation, central bankers would have to become more cautious in their approach to interest rate easing. I never agreed with that narrative as I believe that the negative impact on growth from tariffs would far outweigh the inflationary impulse.
Let’s see what happens over the coming months, but regardless of what ultimately happens in relation to the tariff policies of US president Donald Trump and his evangelistic devotees, the case for lower interest rates in the Euro zone, the UK, and probably the US remains quite compelling.
Observing the instability evident in the US now, one could very easily reach the conclusion that despite the problems in Europe, it is currently a much better place to live than the US.
On Thursday last US president Trump launched a broadside against the chairman of the Federal Reserve, Jay Powell. Mr Trump claimed that Powell would leave his post if he asked him to, that "his termination cannot come fast enough", and he excoriated him for not cutting interest rates more quickly.
Given the importance of the independence of a central bank, having Mr Trump so blatantly interfering with the activities of the Federal Reserve is disturbing. Basically, he now wants to replace Powell with one of his devotees who will do whatever is asked of him or her.
The amazing thing about the market reaction to the comments by Mr Trump relating to Mr Powell, was that there was none. In the past, such political interference in the activities of the Federal Reserve would have elicited a very negative market reaction, but the barmy policies and actions of Mr Trump are now becoming normalised. That is not good.
Mr Trump and his vice-president JD Vance and others in the administration detest the EU. However, it is difficult to conceive of most political leaders in the EU launching such an attack on the ECB president, or Keir Starmer attacking the governor of the Bank of England. Indeed, it is hard to imagine a corporate titan in the EU being allowed eviscerate the governance structures in the EU; the universities being told what they can or cannot teach; a political leader playing golf after doing so much damage to the pensions and savings of their subjects; or boasting about how much money their supporters made as a result of a policy announcement. I could go on, but for many who criticise Europe, it suddenly seems a much saner place to live than in the Trumpian US just now.
For now, the picture presented in the US is not appealing.
Ireland got its latest house price data last week, which showed modest moderation in the rate of increase. Where now for the Irish housing market is difficult to fathom. At one level, the demand/supply imbalance is still dramatic and an indictment of those in charge.
Unfortuntely, logic suggests house prices will keep going up. In February, national average house prices were 17.3% above their April 2007 peak. Even more unfortunate is the fact that the only real way to get house prices back to more sustainable levels would be to crash the economy.
We should be careful of what we wish for, but the threats to Ireland’s economy and its housing market should not be underestimated, such is the intense level of uncertainty now as Mr Trump wreaks havoc on the global economic and political order.
