The Fed has cut rates to near zero and has engaged in credit easing techniques. The Bank of Japan is now willing to again buy stocks from banks and is informally engaging in a quantitative monetary program. That being said the money stock in Japan has been growing by less than 1% for M3 and just under 2% for M2. The Bank of England has been approved to move to a quantitative easing program and has again cut rates last week down to 1%, but the ECB has continued to go slow with cuts and has actually stated that it believes there are drawbacks with quantitative easing.
Sticking to your principles is a laudable but dangerous during this period of weak economic performance. Yes, the ECB has actually been keeping their fund rate below their target levels but the slowdown in the EU is as bad as anything seen in other regions. The ECB is arguing that because they have stickier prices there is less chance for deflation so they can keep rate higher than in the US.
However, the ECB has accepted a wide range of collateral for lending and has increased its balance sheet by over 55% in the last year. The Fed on the other hand has increased its balance sheet by over 200%. The ECB has also lowered the rate on deposits held at the bank so as provide incentives for banks to lend. The Fed pays the Fed funds rate on deposits which is much higher than in the past when there was a penalty rate. Even some in the ECB have stated that they question the wisdom of current Fed policy.
This divergance in opinions will be the key driver for exchnage rates in 2009 because it will be the key macro differentiator across the two regions.
Sticking to your principles is a laudable but dangerous during this period of weak economic performance. Yes, the ECB has actually been keeping their fund rate below their target levels but the slowdown in the EU is as bad as anything seen in other regions. The ECB is arguing that because they have stickier prices there is less chance for deflation so they can keep rate higher than in the US.
However, the ECB has accepted a wide range of collateral for lending and has increased its balance sheet by over 55% in the last year. The Fed on the other hand has increased its balance sheet by over 200%. The ECB has also lowered the rate on deposits held at the bank so as provide incentives for banks to lend. The Fed pays the Fed funds rate on deposits which is much higher than in the past when there was a penalty rate. Even some in the ECB have stated that they question the wisdom of current Fed policy.
This divergance in opinions will be the key driver for exchnage rates in 2009 because it will be the key macro differentiator across the two regions.
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