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.
As Janet Yellen, Fed chair, pointed out last week, the US economy has enjoyed a sustained recovery since the Great Recession. The unemployment rate has declined from a post-crisis peak of 10 per cent to 5 per cent. The annual rate of core consumer price inflation — excluding food and energy — is also close to (though below) the target of 2 per cent. It seems reasonable, given all these facts, to argue that the US economy is both growing at well above potential rate and is close enough to full employment for tightening to begin.