ECB and the Fed On Divergent Paths

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on Mar 17, 2021
Updated: Dec 19, 2022
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Last Thursday, the European Central Bank (ECB) delivered what was supposed to be the first important monetary policy statement of the new year. Indeed, it was, if we consider just the market expectations surrounding the event, the pressure on the euro traders, and what the ECB delivered. 

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Unsurprisingly, the ECB communication failed again. In sharp contrast to the ECB led by Mario Draghi, Christine Lagarde’s ECB communication policy is very confusing to market participants. So confusing that it is often the case that other ECB members intervene in the days following the ECB decision, explaining what the central bank’s intended message was.

This is exactly what happened after the March meeting. At the start of this trading week, Isabel Schnabel, an Executive Director of the ECB Board, explained in more detail while the PEPP cumulative purchases should not be interpreted by their weekly amount, offering better clarity as to what the ECB considers a significantly higher purchase in the Q2 2021.

It is not the same at the Fed. Instead of easing, the Fed faces difficulties in how to communicate accommodative conditions while avoiding an unwanted hawkish tone.

E.U. Losing the Vaccination Race By a Mile

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The Fed is expected today to signal that the rates will stay lower in the near term but to hint at two rate hikes by 2023. In other words, it is already preparing the ground for a gradual lifting of rates – and, for a good reason, because the economy shows signs of a strong rebound.

The economic recovery is led by the success of the vaccination campaign. Quick math reveals that the U.S. will lead the E.U. economic recovery by a lag of at least one-and-a-half months or more. That was before the recent spat with most of the European countries prohibiting the use of the AstraZeneca vaccine on health concerns– one that is on stock and ready to be used. The projected recovery implies the use of all the AstraZeneca jabs, and any delay costs both lives and percentages of GDP.

Moving forward, the two central banks will diverge once again, as they did in the aftermath of the 2008-2009 Great Financial Crisis. Some years ago, the Fed was able to raise the rates to 2.75%, having ammunition to fight the next crisis. The ECB did not move them from -0.5%, having a hard time responding to the pandemic that hit the world.

Finally, even the Recovery Fund’s enthusiasm fades away. Almost one year after the announcement, there is still not a single Euro dispatched – in sharp contrast to what is happening in America.

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