What a contrast. On Thursday, December 16th, the European Central Bank (ECB) President Christine Lagarde’s meeting was the same as Jay Powell, his fellow Federal Reserve (FED) two days ago, confirming This obvious fact. The two institutions are currently adopting different strategies, not to mention adopting opposite strategies in the fight against inflation recovery, and have been observing for a year.
Without completely excluding the possibility of Christina Lagarde, it is indeed believed that the European Central Bank (ECB) is unlikely to raise interest rates next year. In addition, even if the emergency asset purchase plan related to the epidemic is confirmed to be over, the European Central Bank will temporarily increase so-called “classic” purchases after March next year, and maintain flexibility while the economic situation is still very uncertain. In other words, it intends to adhere to a very gradual monetary policy, which seems to be a wait-and-see attitude. On the contrary, the Fed continues to vigorously reiterate the tightening of its monetary policy that it started a few months ago. Although the key interest rate has been raised, the Federal Reserve has just announced the color of 2022. It may raise interest rates three times before the end of the year, and the financial market will stop buying bonds in March next year (quantitative easing).
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The danger of price-wage cycles
At first glance, the ECB’s strategy seems reasonable given the difference in inflation (expected to be 2.6% in the Eurozone in 2021 and 5.3% in the US). Christina Lagarde pointed out that even if the European Central Bank slightly raises its forecast, inflation should still fall below the 2% target during the forecast period. However, the ECB’s choice is only valid if price increases are still a temporary phenomenon. However, the debate on this issue has not yet been resolved. The whole question is whether rising prices will eventually lead to a general rise in wages, which will lead us into an inflation spiral.Obviously, even if the Fed believes that salary increases are not likely to trigger As inflation accelerates, the US monetary agency is more willing to take immediate action to avoid persistent inflation that is well above its 2% target. Although the European Central Bank currently does not see its urgent need.
But the monetary policy gap between the Fed and the European Central Bank is also based on a different approach, which is to use the leverage they can use to deal with price spikes. For example, in previous periods of inflation, such as the 1980s and 1990s, interest rates were the core pillar of monetary policy. In response to inflation, the central bank raised short-term key interest rates, which led to a knock-on effect of rising prices for consumer loans, mortgage loans, and corporate loans.The general rise in interest rates has led to very good Due to slowing activity and stable prices.
Today, central bankers have several levers of action. In addition to interest rate weapons, they can also inform the financial market of the direction of their monetary policy based on the number of financial assets (QE) they purchase, bank liquidity, and their communication. But this larger palette must be handled with care. The tools of action are intertwined, and activating one of these levers is not neutral to the others. In other words, these must be used in the correct order and in the correct way. This is the choice of the European Central Bank today. The European Central Bank is eager to avoid causing harmful phenomena, such as a sudden increase in long-term interest rates or the devaluation of financial assets, which may weaken the strength of banks and insurance companies. Therefore, the European Central Bank prefers to avoid any premature, hasty and chaotic behavior. The limitation of this approach is that it slows down its responsiveness in monetary policy. The Fed is biased towards the urgency of action to strictly abide by the chronology.