Janet Yellen, chair of the U.S. Federal Reserve and Mario Draghi, president of the European Central Bank, had conversation during the Jackson Hole economic symposium in Moran, Wyoming. Their discussion will be end the year shaping each other’s decision making.
That’s what some economists are saying a day after European Central Bank President Draghi all but committed to fresh stimulus for the euro-area in December. The same month was already a focal point for investors debating whether Federal Reserve Chair Yellen would raise the U.S. benchmark for the first time since 2006.
The upshot is that the final month of the year, traditionally a time for winding down and vacations will be the scene for two of the biggest policy decisions of 2015, with repercussions for currencies, stocks and bonds around the world. The outcome will either be the long-anticipated split in transatlantic policy or a united extension of easy money.
How the euro trades against the dollar in the coming weeks is a key factor for investors trying to gauge the outcome. Europe’s shared currency tumbled to a two-month low on Thursday after Draghi’s stimulus signal.
“There’s this game of currency tennis between the Fed and the ECB and it will continue play out for a while longer,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.
As Kounis sees it, the Fed’s decision to delay increasing rates in September pushed the dollar down against the euro, threatening European inflation by making the bloc’s exports more expensive and its imports cheaper. That forced Draghi to say he’s considering even looser monetary policy when ECB officials next convene on Dec. 3.
If Draghi acts, weakening the euro, then the likelihood of a stronger dollar would probably influence the Fed’s thinking when its policy makers gather two weeks later, said Kounis.
“The signal from the ECB makes a December Fed rate hike less likely by pushing the dollar back up against the euro and tightening U.S. financial conditions,” said Krishna Guha, vice president at Ever core ISI in Washington.
By contrast, if global equity markets continue their rally on the back of ECB action then that could “give the Fed a bit of a smokescreen to launch its first rate hike,” said Steve Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London.
That would mark a new era, with two of the world’s largest central banks pulling in opposite directions.
“We know that monetary trends between the U.S. and euro zone have been diverging for a while, but polar-opposite moves in the same month would surely take divergence to a new level – and perhaps euro/dollar to a new low,” Barrow said.
Yellen last month cited “financial developments” when the Fed chose not to tighten for the first time since 2006. Vice Chair Stanley Fischer and New York Fed President William Dudley have since said an increase this year is still likely provided events overseas don’t undermine forecasts for higher inflation.
Investors are taking the ECB president’s threat of more easing seriously, according to Jean-Claude Trichet, the former president of the ECB whose “vigilance” on policy Draghi channeled in Frankfurt Thursday. Draghi’s message was “very clear,” Trichet said in an interview on the sidelines of a conference in Milan.
Still, what the ECB does may not be crucial for the Fed given that a gain in stocks would offset a strengthening of the dollar, according to Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.
The “ECB meeting plays a very little role in how we think about U.S. monetary policy or the U.S. economic outlook,” he said.
The Fed could indeed still have dominance over global monetary policy. If U.S. officials start indicating they will delay rate hikes until 2016 then the euro could reverse its fall against the dollar, forcing the ECB to be even more aggressive by taking the rate on overnight bank deposits more negative, said Dirk Schumacher, an economist at Goldman Sachs Group Inc.
“If Fed ’lift-off’ in December continues to be priced out, Mr. Draghi’s hand would be forced, making a deposit-facility-rate cut our base case in order to cap euro strength,” said Schumacher.
Yellen and Draghi - Decisions
