Fed Cuts Rates While ECB Holds Steady: Analyzing J. Safra Sarasin’s Insights Amid Labor Risks

Original article: La Fed recorta y el BCE se queda quieto: la prudencia que anticipó J. Safra Sarasin choca con el riesgo laboral

The Swiss bank deemed it unnecessary to rush changes in October, anticipating a pause from the ECB; little did they realize, the Fed cut rates while the ECB remained steady: the caution predicted by J. Safra Sarasin collides with labor risks as financial system adjustments continue while supply chain demand and supply remain influenced.

By Bruno Sommer

Central banks from the two largest advanced economies concluded the week with contrasting messages. The Federal Reserve trimmed interest rates by 25 basis points to a range of 3.75%–4.00%, while the European Central Bank kept all three of its benchmark rates unchanged for the third consecutive meeting. This U.S. decision stood in contrast to the cautious approach suggested by Karsten Junius, Chief Economist and Director of Economic Research at Bank J. Safra Sarasin, who believed neither central bank needed to hasten rate increases in October.

In a report leading up to the meetings, Junius argued that although inflation risks persisted, both the Fed and the ECB needed to weigh inflationary pressures stemming from energy prices and the impact of tightening financial conditions. According to him, this balance advised patience: the ECB would maintain rates, and the Fed could afford to wait. The Swiss bank even considered that the next move by the Fed could be an increase in December, targeting a terminal rate between 4.75%–5.00%.

However, the reality told a different story. The Fed implemented its second consecutive rate cut, justifying the decision by stating that while inflation «remains high,» downside risks to employment had increased. Unemployment was at 4.3%, and job growth had nearly stalled. The move was not unanimous: two members opposed it, one advocating for a 50 basis point cut and another in favor of maintaining rates. The U.S. CPI stood at 3.0% year-on-year, both overall and in the core reading, with gasoline prices rising 4.1% and energy index climbing 1.5%.

In contrast, the ECB adhered to the scenario anticipated by Junius. Keeping rates steady was consistent with an inflation rate in the Eurozone that dropped to 2.1% in October, near the target of 2%, influenced by a 1.0% decrease in energy prices. Additionally, spontaneous tightening of financial conditions in the Eurozone, due to fiscal concerns in France, raised sovereign debt yields and widened spreads for peripheral countries. This context diminished the urgency for further adjustments from Frankfurt.

This divergence sends a clear signal to markets: the Fed prioritized the nascent weakness in the labor market over inflation that still exceeds its target, while the ECB could afford a pause because inflation was nearing its goal and financial conditions were already tightening. Thus, the caution foretold by J. Safra Sarasin found its best expression in Frankfurt; in Washington, labor urgency took precedence.

Analysis | When Adjustment Comes from the Financial Core, Not Supply and Demand Balance

The divergence between the Fed and the ECB raises an uncomfortable question: to what extent does economic adjustment stem from a real rebalancing between supply and demand, and to what extent from conditions imposed by the financial system’s core? When interest rates, liquidity, risk premiums, and collateral move due to policy decisions or market stress, the cost of readjustment does not necessarily fall on those generating imbalances. It hits small and medium-sized enterprises (SMEs), indebted households, and long-term investment projects especially hard, while those with greater market power or privileged access to financing can better withstand and even expand their relative position.

The problem intensifies when supply and demand are already distorted by political interventions, military conflicts, or supply chain disruptions that favor certain actors over others. In this context, monetary policy can combat demand inflation, but it hardly resolves supply inflation. Raising rates does not unblock a port, replace an energy source, or diversify a supply chain; often, it just redistributes the cost of adjustment and may consolidate income for those in a better position.

This is not about attributing a generalized intent to every political or business decision, but rather highlighting a design risk: if adjustment is imposed from the financial core while supply and demand remain influenced, monetary policy gains in macroeconomic discipline but loses in distributional precision. The result could be more persistent inflation, higher credit costs for the productive economy, and greater market concentration. Thus, the critical reading does not invalidate the decisions made by the Fed and the ECB, but it does condition them: without fiscal, energy, competition, and supply diversification policies, financial adjustment risks replacing real adjustment rather than accompanying it.

By Bruno Sommer