Tuesday, 8 December 2015

The challenges of central bank divergence By Martin Wolf

The US is years ahead of the EU in recovery and so at a different stage of the monetary policy cycle
Janet Yellen, chair of the U.S. Federal Reserve, speaks during her semiannual report on the economy to the Senate Banking Committee in Washington, D.C., U.S., on Thursday, July 16, 2015. Yellen said the Federal Reserve is "highly focused" on the risks of raising interest rates too early. Photographer: Drew Angerer/Bloomberg *** Local Caption *** Janet Yellen©Bloomberg
Janet Yellen, Federal Reserve chair
The European Central Bank eased monetary policy last week, albeit not enough to please markets. But the US Federal Reserve is widely expected to raise short-term rates next week. This divergence between the most important central banks is likely to prove significant. Does this make sense for each in view of their own mandates? And what complications might such a divergence create for the world?
At first glance, the answer to the first question is straightforward: yes. The Fed and the ECB ought to be following different policies because their economies are in such widely different places.


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