Central banks in Europe and the United States have been deeply involved in the divergence of monetary easing since the emergence of three lows in the economy.

category:Finance
 Central banks in Europe and the United States have been deeply involved in the divergence of monetary easing since the emergence of three lows in the economy.


A large hedge fund manager on Wall Street told reporters that the main reason for such a serious divergence within the ECB is that the economic development of European countries is different. In view of the economic recession and increasing debt-servicing pressure, countries in southern Europe and other regions urgently need the ECB to launch a large-scale QE plan to stimulate economic growth and stabilize financial markets; Germany, France With the Netherlands and other countries due to the obvious economic recovery in previous years, more emphasis is placed on slowing down the pace of monetary easing to control rising inflation pressure.

How to bridge the differences within the ECB is creating new challenges for the incoming ECB President, Christine Lagarde. He pointed out.

More importantly, as financial markets worry that the economic pull effect of the new QE plan is worse than before, the central banks of Europe and the United States have to convince the market that their new round of monetary easing can lead the economy out of the current trade tension and weak growth as soon as possible. He stressed.

The European Central Banks Eagle-Dove Debate

The divergence within the ECB over the new QE plan is so huge that financial markets are indeed shocked.

I thought the ECB would unanimously adopt the QE plan, but I didnt expect German, French and Dutch officials to vote against it. They almost have a third of the ECBs monetary policy voice. The big Wall Street hedge fund managers mentioned above pointed out to reporters. The main reason why these countries oppose the above QE plan is that the new QE plan will lead the ECB to break through the self-imposed bond purchase restrictions, which will bring new legal challenges to the new QE plan.

Previously, the ECB stipulated that the ECB could buy one third of the national debt issued by each member country. With the ECB continuing to push forward QE plan in previous years, the size of the bonds held by the ECB in Germany and other European countries has approached this ceiling, and there is little room for future bond purchases.

So German, French and Dutch officials demanded that the ECB should use QE as a last resort to stimulate economic growth and should not use it lightly.

Thats just the superficial reason. He analyzed it. The deeper reason is that Germany, France and the Netherlands all experienced good economic recovery in the past few years, compared with the slow economic recovery in southern European countries, so they focused more on moderately slowing down the pace of monetary easing to control rising inflation pressure. In addition, these central bank officials also believe that the current yield of bonds in Germany and other European countries has fallen into negative value. The ECBs new QE bond purchase plan does not help to steepen the yield curve of bonds, thus attracting a large amount of capital into the real industrial economy, and the corresponding economic pull effect may not meet the policy expectations.

Despite continuing opposition, the ECB adopted a rate cut + QE restart plan in September, indicating that most European countries still hope to save the risk of economic recession through the new QE plan.

After all, many southern European countries are constrained by factors such as social stability, resulting in their economic growth heavily dependent on a relaxed monetary environment. Moreover, as the risk of a global recession increases and the pressure on these countries to repay their debts increases sharply, they also hope that the ECB will buy their bonds in large quantities to hedge against the surge of bond selling by financial institutions and avoid the emergence of a new European debt crisis.

It is worth noting that as the divergence within the ECB over the QE restart increases, financial markets are worried about the ECBs ability to achieve the euro zone inflation target, which measures the markets five-to-five-year inflation swap rate on inflation expectations in Europe over the next decade, once fell to a record low of 1.11%, far below the ECBs inflation target of 2%.

If financial markets are concerned about the effectiveness of ECB monetary policy, it may trigger sharp fluctuations in financial markets in the European region and further plunge the European economy into recession. Peter Tchir, macroeconomic strategist at Academy Securities, points out.

What never happened

Behind this, European and American economies are facing a new situation that has never been seen before, namely, low growth, low inflation and low interest rates. The big Wall Street hedge fund managers mentioned above pointed out to reporters. The problem lies in how to effectively regulate the steps of interest rate reduction and QE restart, which can stimulate economic growth and avoid economic deflation, as well as liquidity traps in financial markets, which make the European and American central banks nervous.

Federal Reserve Chairman Powell also made it clear that the U.S. economy and other developed economies are facing some long-term challenges, including low growth, low inflation and low interest rates. Low interest rates may be a good thing, but when inflation -- and the resulting interest rates are too low -- the Fed and other central banks have less room to cut rates to support the economy in a downturn.

This is one of the reasons why the Federal Reserve has to take a step-by-step look at whether to speed up interest rate cuts or restart QE based on the latest changes in economic data and economic development conditions. The hedge fund manager analyzed it. Since the U.S. economy has never experienced low growth, low inflation and low interest rates in the past, the Federal Reserve is unable to formulate its own specific pace of monetary policy easing based on past experience.

In his view, the Fed may not necessarily introduce negative interest rates, or even be cautious about the pace of interest rate cuts, as the ECB goes further and further in restarting QE and negative interest rate policies. The reason is that the Federal Reserve believes that negative interest rates will lead to a sharp drop in bank credit profits and a big reluctance to lend, which will greatly reduce the transmission mechanism of monetary policy.

Behind this, European and American central banks have different demands to start a new round of monetary policy easing cycle. Compared with the Federal Reserves preventive interest rate cut to deal with the negative impact of trade tensions on domestic economic growth, the ECB also has to take into account the economic development situation of different member countries and the pressure of treasury bond payment.

Reporters have learned from many sides that despite the serious internal differences of the European Central Bank, most of the investment institutions still prefer that the European Central Bank will follow the practice of the Bank of Japan. As the negative interest rate policy goes further and further, it will launch the QQE measures that cooperate with the Treasury bond yield curve control, so as to avoid the recurrence of the European debt crisis and invest a large amount of QE funds to stimulate economic growth.

However, the bigger challenge facing central banks in Europe and the United States is how to convince financial markets that their monetary easing policies will have a good effect on stimulating economic growth. After all, more and more financial institutions are questioning the pulling effect of the new round of QE measures on the economy is not as good as before. On the contrary, the central banks in Europe and the United States have huge assets and liabilities. As a result, the flexibility of monetary policy has been further reduced, leading to a longer-term risk of recession. Peter Tchir points out.

Source: Responsible Editor of Economic Report in the 21st Century: Chen Hequn_NB12679