One Interest Rate Hike Closer to Eurogeddon

Includes: FXE
by: David Beckworth

The ECB today followed through on its plans to tighten monetary policy, the second time it has done so since April. As I have noted before, tightening monetary policy is the worst thing the ECB could be doing right now if it truly cares about preserving the euro zone in its current form.

If the ECB does care, it should be easing monetary policy to help bring about a real appreciation in the core countries and real depreciation in the periphery. Even if the ECB is indifferent, there is still no justification for tightening monetary policy based on its objectives -- for, as Rebecca Wilder notes, inflation expectations are down and the growth in the ECB's targeted monetary supply is tapering off.

So this tightening cycle is truly bewildering. Maybe the tightening cycle is to provide cover to the ECB buying up debt from the periphery, or maybe the ECB is trying to hasten what seems to many the inevitable downsizing of the euro zone.