Fed vs. ECB: Why Trichet Should be Inspired by Bernanke

ForexNewsNow | Published on September 6, 2011 at 4:16 am

NEW YORK (ForexNewsNow) – At the meeting of the US Federal Reserve’s Monetary Policy Committee on August 9th, the  Fed announced that it would maintain its refinancing rate close to zero over the next two years (until 2013).

Later that month, at the symposium in Jackson Hole, Fed chairman Ben Bernanke, officially estimated that the US economy’s weakness presented an inflation risk and did not rule out enacting a new direct buyback program for securities, that is to say monetizing the debt. Since the beginning of the crisis, the Fed has already taken up about a trillion dollars of US public debt securities, after having taken even more private securities.

The European Central Bank (ECB), whose President will finish his mandate in two months, has been much stricter against inflation figures. On July 7th, in the middle of the debt crisis, the ECB decided to raise its key rate by a quarter of a point, bringing it to 1.50%, which increased the pressure on European loans rates. Greek, Irish, Portuguese, Spanish and Italian crises forced the European institution to finally consent to buy massive amounts of securities in order to avert a wider crisis.


Forex decisions, Growth consequences

In Europe, not only do governments not agree on pooling their debts and accelerating political integration, but the ECB, focused solely on the fight against inflation and obsessed by its independence, is using the wrong tools for the job.

The reluctance of governments and central banks to act quickly reinforces speculative rumors that aggravate the problems in the euro zone. Thus, Trichet should not be ashamed to focus more, as Bernanke does, on growth and employment rather than strictly on inflation in the euro zone.

Finally, the interest rate differential between Europe and the United States encourages a type of transaction – so-called “carry trades” – a Forex trading technique that consists of borrowing in a currency with low interest rates (US Dollar) and investing the funds borrowed in another currency with higher interest rates (Euro).

This can lead to an overvaluation of the EU’s single currency and does not contribute to the growth of the most fragile European countries, compounding their difficulties.


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