It was a week of meetings for the ECB and the FED, and the mood was for a change in both cases.

The European Central Bank has become aware of the impact of its tightening of monetary policy on the economy. Consequently, it reduced the pace of its rate hikes to 25 basis points from 50 basis points at its last three meetings, bringing its benchmark rate to 3.25%. However, Christine Lagarde has hinted that she will increase rates again in the wording of her statement.

The reduction to 25 basis points and a relaxed commitment to do more signal a significant shift in the ECB’s political outlook. With inflation well below its October peak and a gauge of underlying price pressures falling for the first time in 10 months, the ECB is looking at the end of its unprecedented period of monetary tightening. The rate hike cycle could end in June if the inflation data improve. The work is not quite done yet. The markets are still expecting two more rate hikes of 25 basis points.

But the real reason lies elsewhere and is to be sought in a divided ECB council between the austerity-minded northern governors and a much more growth-focused Southern Europe. In addition to the inflation issue, the latest economic data has revealed slower-than-expected economic expansion in the Eurozone and tighter-than-expected credit conditions from banks, further threatening growth.

While officials assert that the continent’s financial system is sound, the fresh turbulence in the US comes as European lenders are due to repay nearly 500 billion euros of cheap long-term funding to the ECB next month.

In reality, Christine Lagarde is walking a tightrope in a divided council with no direction and without long-term vision.

The FED increased the federal funds rate by 25 basis points to 5 to 5.25%, bringing it back to the same level around 15 months before the 2008 financial crisis. In the statement that followed, predictions of further rate hikes were removed. Therefore, a pause is likely.

The statement also mentioned that the US banking system is solid and resilient. This did not prevent another regional bank from announcing half an hour after the closing bell that it was reviewing its strategic options. In other words, it was in serious trouble.

The recent collapse of First Republic Bank and massive selling in regional banks have raised concerns about the sector’s vulnerabilities and heightened fears of a credit crunch that triggers a sharp economic landing. The 60% plunge of PacWest left investors even more nervous about the financial system’s health.

The inflation genie has escaped from the bottle, and the Fed has still not caught it. But the looming recession and a more vulnerable banking system could change the game. It is not good news for the US economy and the rest of the world.