Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Fed Policy Shift Raises Heat on the ECB 

Published 08/28/2020, 02:35 AM
Updated 08/28/2020, 03:36 AM
© Reuters.  Fed Policy Shift Raises Heat on the ECB 

© Reuters. Fed Policy Shift Raises Heat on the ECB 

(Bloomberg) -- The European Central Bank is probably a step closer to aiming for periods of inflation above its goal now that the U.S. Federal Reserve has adopted that strategy, according to economists and its former vice president.

The Fed’s new approach, unveiled by Chair Jerome Powell on Thursday, is to seek inflation that averages 2% over time. That would allow it to tolerate a faster pace after periods of weakness, avoiding early interest-rate hikes when price growth moves close to its target.

President Christine Lagarde could find that a tempting option as she resumes an ECB strategy review that was delayed by the pandemic. It would allow her to keep monetary policy looser for longer, worrying less about the hardliners who tend to talk about reining in stimulus even on the rare occasions that inflation has neared the current goal of “below, but close to, 2%.”

“I can’t help but think that the Fed has been setting the tone across major central banks,” said Piet Christiansen, chief strategist at Danske Bank. “I’m sure the ECB would weigh the pros and cons of this measure.”

Low inflation has been a longstanding concern for major central banks. The worry is that it morphs into deflation -- a downward spiral of prices and wages that has historically wrecked economies -- during a shock, such as the current pandemic. They’ve responded by pumping trillions of dollars worth of currency into the financial system, with only limited success.

Former ECB Vice President Vitor Constancio is among those saying his prior employer would benefit from so-called average inflation targeting, especially because price stability is its primary mandate. In contrast, the Fed has in the past pointed to full employment as evidence it has met at least part of its dual mandate.

The ECB will soon have the chance to take such a step. It’s conducting its first strategic review since 2003, expected to conclude in the second half of next year. The Fed did a similar evaluation before deciding on its latest change.

Lagarde’s wide-ranging appraisal includes climate change and digitalization, but the reasons for low inflation -- globalization, aging populations and weak productivity -- are at the core.

The key question is whether the current goal itself is part of the problem, by encouraging policy tightening too soon.

It could prove to be a thorny topic. Officials such as Bundesbank President Jens Weidmann, who has frequently opposed looser ECB policies, and Austrian Governor Robert Holzmann, who’s suggested a lower inflation target, may have to be persuaded of any shift that allows price gains above 2%.

Bank of France Governor Francois Villeroy de Galhau, who has previously endorsed a look at average inflation targeting, declined to speculate much when he spoke at an event hours after Powell’s announcement.

“I won’t anticipate the result, but you can be reassured that a credible and symmetrical inflation objective will remain at the heart of our action,” he said.

A change might also be a hard sell publicly. Years of extraordinary monetary stimulus has stoked criticism, with politicians in some countries regularly lambasting the ECB for the impact on savers. Its deposit rate has been below zero for six years.

“The Fed saying this is different from the ECB saying it, because the Fed had actually hiked rates several times,” said Rishi Mishra, an analyst at Futures First. “So they can say ‘hey, we might have been too hawkish last time around. This time, we would wait longer.’ What would the ECB say? ‘Hey, we have been waiting forever, and would continue to wait forever?’”

Economists and strategists including Carsten Brzeski at ING Groep (AS:INGA) NV and Frederik Ducrozet at Pictet & Cie reckon the ECB will change its goal, but that it won’t follow the Fed entirely, in part because of skepticism on the Governing Council.

More likely, it’ll settle on a so-called “symmetric” goal of 2% with flexibility, they say. In practice, that means it’ll tighten policy when inflation is above that rate, and loosen when it’s below, but won’t rush too quickly to do so.

“There won’t be a majority at the Governing Council to simply copy the Fed’s move,” said Brzeski. “In the euro zone, the concept of average inflation targeting has been more controversial.”

Latest comments

All these Central Banks do is print money that the tax payer is on the hook for. Obama sent plane loads of cash to Iran illegally, one of the largest funders of terrorism.
= Gold $50000
Only physical gold, silver, PM miners and bitcoin are going to save us from the world wide central bankers scam. All currencies are losing value every time new money is printed out of thin air...
What is gold or silver? A piece of metal. You can't even eat it. What is bitcoin? An even more "nothing" in the perspective of living.
 What a poor judgement. Can you eat a 100$ bill??
Bitcoin is valued by dollar, it’s not an asset; when the dollar collapse it’ll go through the same. Gold and silver are the real assets, know by humanity since it’s very first beginning.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.