The European Central Bank has chosen to follow the Federal Reserve’s lead and make its inflation targeting more flexible, giving it leeway to keep rates low for longer.
In what is billed as its first strategy review since 2003, the ECB says its inflation target is now 2%, not “below 2%,” and it will tolerate inflation higher than that temporarily.
It was the German central bank, the Bundesbank, that imposed stricter inflation targets at the Frankfurt-based ECB, when Germans and their like-minded colleagues (Wim Duisenberg, Jean-Claude Trichet) dominated the euro guardian at its inception.
That's all history now, as the ECB under the politically oriented Christine Lagarde is eager to follow the easy money policy of the Fed.
The ECB, however, is willing to take the lead in promoting climate-friendly policies and the same strategy review called for new emphasis on avoiding high-emission companies in its bond purchases and collateral acceptance.
Also, the ECB is willing to incorporate surging home prices into its inflation measures, while the Fed maintains it is not feeding a real estate bubble with its purchase of mortgage-backed securities and low interest rates.
Patience Remains The Byword
The minutes of the mid-June meeting of the Federal Open Market Committee, released last week, indicated that some policymakers at least think the time is near to start communicating how it will taper its $120 billion in monthly bond purchases.
The minutes’ account of FOMC opinions is a poster child for waffling, as participants don’t think it’s time to taper yet, but that time might come sooner than expected, and it would be “prudent” to have a plan for tapering “in response to unexpected economic developments.”
Likewise, inflation expectations—far more important for policymakers than actual inflation—remain well-anchored, in their view, though “several participants expressed concern that inflation expectations might rise to inappropriate levels if elevated inflation readings persisted.”
Their considered opinion: wait and see. Patience is their byword.
Yields on US Treasury bonds and notes declined sharply as investor worry about global economic growth rose amid resurging COVID infection rates.
San Francisco Fed chief Mary Daly said that COVID variants and low vaccination rates in various parts of the world continue to pose serious risks to the economy.
“I think one of the biggest risks to our global growth going forward is that we prematurely declare victory on COVID,” she said in an interview.
Japan, for instance, has seen a new surge, prompting officials to ban all spectators from the Tokyo Olympics, instead of allowing residents to attend at half-capacity.
The projections of Fed policymakers moving up the anticipated date of interest-rate increases to 2023 gave investors pause about growth, because higher rates would dampen the economy.
Atlanta Fed chief Raphael Bostic suggested last month that “upside surprises” in economic data indicate inflation might last longer than expected, prompting him to predict the initial increase in interest rates for late 2022.
The Fed’s twice-yearly Monetary Policy Report, issued ahead of Fed Chairman Jerome Powell’s testimony to Congress, hinted on Friday that policymakers are beginning to think that COVID has permanently altered the labor market and their goal of reaching pre-pandemic levels of employment may be more difficult than anticipated.
“The post-pandemic labor market and the characteristics of maximum employment may well be different from those of early 2020,” according to the report.
Bottlenecks in supplies and labor could create inflationary pressures “more lasting” than anticipated, “but likely still temporary.”
So Powell can expect a grilling in appearances before House and Senate committees this week, as lawmakers try to pin him down on just what he expects to happen with inflation and employment and what the Fed will do.