International Interdependence in Central Banking

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

Labor cost pressures are a bigger problem for the European Central Bank than for the Federal Reserve. In early June, ECB President Trichet shocked the markets when he indicated that the ECB could raise short-term interest rates as early as July (ECB policymakers will meet this Thursday) to ground inflation expectations. It may be a closer call than the market expects, but even if the ECB doesn’t hike this week, it almost certainly will in August. That sets up a dilemma for the Fed.

Fed Chairman Bernanke has elevated the role of the dollar in monetary policy. Exchange rates are determined by a variety of factors: trade imbalances over the long term, growth differentials over the intermediate term, and central bank differences in the short term. The U.S. would risk a weak dollar if it doesn’t follow the ECB (although this is one small piece of the overall picture for monetary policy).

Still, there’s an important question of whether the Fed, and U.S. monetary policy, has enough control over the U.S. economy. The Fed can’t do anything about higher oil prices, but it can work to keep inflation expectations anchored – and that would come at the expense of slower economic growth.

Central banks of the emerging economies may have to tighten monetary policy to check inflation in the months ahead. If they don’t, the Fed’s job will become more difficult, but not impossible.

Comments

[icandoitdon]

"The U.S. would risk a weak dollar if it doesn’t follow the ECB"

i kind of like the idea of the u.s. federal reserve following the lead of the ECB. they've proven they can't lead...so let them follow.