The European Central Bank should seek a strategic review by the Fed

President Joe Biden’s massive fiscal stimulus is being closely watched around the world. But this is not the only economic experiment conducted in Washington. It can stimulate policy rethinking elsewhere. Last summer, the Federal Reserve’s regime change-becoming more tolerant of inflation exceeding its target-is now feeling its influence in the European Central Bank’s strategic review.

in a Interviewed by “Financial Times”The governor of the Bank of Finland, Olli Rehn, covered up his position to support the Fed’s reform of the European Central Bank’s own policies.

Last year, Fed Chairman Powell announced two important changes in the way the U.S. Central Bank sets monetary policy. Now, it treats inflation as an average over a period of time, rather than a snapshot at a specific moment in time. Under the current circumstances, since the global financial crisis, the inflation rate has not reached the 2% target for most of the time. This will cause the inflation rate to overshoot for a period of time to make up for the lost ground.

The Fed also adopted an asymmetric view of employment, believing that a weak labor market is itself a problem, but a strong labor market is only a problem if it does push up inflation.

Legally speaking, the European Central Bank is free to transfer policies in two dimensions. It can set its own definition of price stability, and its mission requires it to consider broader policy goals, including employment, without undermining price stability. But is it wise to follow the Fed?

The answer is that the factor that led Powell and his colleagues to formulate a new route is whether the euro zone is performing better. The growth of consumer prices in the single currency area is far below the U.S. central bank’s target. This has caused correspondingly greater economic distortions, and actual debt liabilities are larger than what the lender or borrower would expect when the ECB maintains normal inflation.

As Rennes emphasized, the current inflation target set by the European Central Bank (“below but close” to 2%) indicates a downward bias. A clear and symmetrical average time target will be clearer and can well improve the positioning of inflation expectations.

Even after the unprecedented adoption of a 750 billion euro co-recovery plan last year, the member states of the currency union are unlikely to carry out fiscal stimulus near the current size of the United States. This means that the reasons for currency tightening in the Eurozone are much weaker than those on the Atlantic coast.

Within the scope of its mandate, more explicit consideration of employment conditions when formulating policies will help the European Central Bank to signal that it intends to maintain financing conditions that are conducive to investments by both the public and private sectors in the economy. Restore its full potential. The world is moving towards a more coordinated relationship between fiscal policy and monetary policy, and the central bank’s strategy should continue to evolve to ensure that any such coordination is safe and transparent.

Therefore, there are good reasons for the European Central Bank to update its strategy in the same way as the Federal Reserve. The bigger challenge is to prove that it can be achieved. After years of failing to meet the low-demand current inflation target, one must be skeptical. The European Central Bank is not without ammunition, but its lack of vigilance against previous shortages shows that it is unwilling to use all its power. The strategic review is an opportunity to dispel such doubts.

Source link