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.