Breaking News
Investing Pro 0
💎 Access the Market Tools Trusted by Thousands of Investors Get Started

Fed, ECB to tighten policy in tandem

Published Jun 08, 2018 10:19AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. Fed, ECB to tighten policy in tandem
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

By Balazs Koranyi

FRANKFURT (Reuters) - Tightening policy by a notch just one day apart, the world's top two central banks will hope to signal confidence in global economic growth, despite risks of a trade war, currency swings and political turbulence.

The U.S. Federal Reserve is almost certain to raise rates again on Wednesday, inching closer to a neutral policy stance, while the European Central Bank is likely to signal on Thursday that its 2.55 trillion euro bond purchase scheme will end this year, a key move in dismantling crisis-era stimulus.

Though largely a coincidence, their twin steps suggest the era of cheap central bank cash will soon be over. That indicates major economies are strong enough to stand on their own but also that central banks are keen to replenish their policy firepower before the next downturn.

For the ECB, the next step is likely to be another in a series of incremental moves, as policymakers seek to avoid any potential backtracking, mindful of their two disastrous rate hikes in 2011, which exacerbated the euro zone's debt crisis.

The euro zone economy has been growing for over five years, employment is at a record high, wage inflation is increasingly clear and bond purchases have done all they could to cut borrowing costs, making ending the scheme the logical next step.

The ECB has already said the 2.55 trillion euro ($2.99 trillion) asset purchase program's fate will be on the agenda on Thursday but ECB President Mario Draghi must decide whether to declare the end or wait until policymakers next meet in July.

The end of quantitative easing raises a tricky issue for the ECB: interest rate hikes are tied to the end of the purchases, with the bank's guidance stipulating that rates will stay unchanged 'well past' the program's conclusion.

With no purchases into 2019, more specific guidance will be needed to keep rate hike expectations anchored and to give the bank flexibility to delay if needed.

It is expected to opt for a formula that specifies steady rates for several quarters and for as long rates are consistent with its near 2 percent inflation target.

But with growth slowing and yields on the periphery rising due to fears of political instability in Italy, downside risks appear to be increasing, suggesting to some that the ECB may try to get out early to avoid being dragged into politics.

"For what it's worth, the ECB has recently decided to look through political events," UBS said in a note to clients. "Moreover, some countries may have an interest in reducing the support to a populist government. After all, the QE program also entails buying Italian government bonds."

Some even argued that the ECB may opt for a June decision because it fears bond market turbulence later that would make a July move more difficult.

"Accelerating the end-date announcement due to fears of an even more clouded economic outlook later on, fueled by policy uncertainty, would do little to enhance the ECB's credibility" Societe Generale (PA:SOGN) economist Anatoli Annenkov said.

"The ECB would again risk committing to action too far in advance and reacting excessively to oil price movements," he added, referring to the 15 percent rise in Brent crude prices this year, which has pushed headline inflation higher.


For the Fed, raising rates by 25 basis points to a range of 1.75 percent to 2 percent appears an easy call.

The U.S. central bank is meeting both of its objectives -- its preferred inflation rate is at 2 percent and the economy is at full employment.

The question is whether its rate hike projections -- three moves both this year and next -- move up and whether it expects to hit the so-called neutral interest rate quicker than earlier thought.

"The domestic risks facing the US economy are arguably tilted to the upside," ABN Amro economist Bill Diviney said.

"A significant amount of fiscal stimulus is coming on stream when the economy is by many measures close to full capacity, and growing at an above-potential pace."

An overheating labor market would argue for quicker tightening but inflation is expected to stabilize around target and the Fed is likely to be careful in any move above the neutral rate, which neither stimulates not cools the economy.

Another issue to watch will be the Fed's assessment of the growing external risk from an increasingly long list of sources, like a global trade war, or sovereign risk in places like Italy, Turkey or Argentina.

Fed, ECB to tighten policy in tandem

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your profile, will be public on and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email