As global growth prospects have weakened, the world of central banking has been turned upside-down. But while the US Federal Reserve (Fed) has already hinted at a change of course, the European Central Bank (ECB) is still struggling to adapt to the new reality.

It’s not long ago that markets were anticipating synchronized global recovery and a gradual normalization of central banks’ monetary policy. Now, a reappraisal of the outlook has prompted a reversal. That’s particularly true for the Fed. Just six months ago, the US central bank was widely expected to continue raising interest rates as far as the eye could see. Now, the outlook has darkened, and the market is pricing in between 75 and 100 basis points of cuts by the end of next year.

Fighting the Downturn

The good news for the US economy is that that the Fed has room for manoeuvre and is willing to use it. That should help cushion growth at a time when trade headwinds continue to mount. Spare a thought, though, for the ECB.

Over the last few years, the ECB has thrown the kitchen sink at the euro-area economy in an attempt to drive inflation back to target. It’s had some successes, too, with unemployment falling faster than expected and wage growth starting to pick up. Yet core inflation is still rooted at 1.0%, well below target and with little evidence of upward momentum.

Downside Risks Are Rising

Now, €2.5 trillion of bond purchases later and with rates still in negative territory, downside risks are rising fast and the ECB seems uncertain how to respond. It would never admit as much, of course, but after throwing so much at the economy in recent years, perhaps the ECB fears it’s running out of options.

ECB on the Rack

That would certainly explain two things. First, the central bank’s indifference to the recent decline in market-based inflation expectations, now back within touching distance of their 2016 lows. Until recently, this was the key metric by which the success or failure of euro-area monetary policy was meant to be judged. But, at recent press conferences, ECB President Mario Draghi has gone out of his way to downplay their importance. Second, Draghi’s insistence that fiscal policy would “play a fundamental role” should downside risks start to crystallize.

No Easy Answers

Sadly, there’s no fiscal white knight ready to ride to the rescue in the euro-area. And the longer the ECB procrastinates, the greater the risk that inflation expectations become unanchored and deflationary expectations take hold. Like us, the ECB might doubt the effectiveness of another round of rate cuts or asset purchases. Ultimately, though, the ECB’s mandate demands action and that’s why we think a fresh round of stimulus is in the pipeline. Draghi once famously promised the ECB would “do whatever it takes to preserve the euro”. Come November, it will be up to his successor to make good on that promise.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.