 MSB | Students |
Faculty/Staff | Alumni | Research | Exec Ed | Resources | News |
| |  |
|
 |
| ||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
| |
Michael Brandl > Macro Updates > Archives > December 7, 2005 December 7, 2005 Europe’s Paul Volcker. Pity poor Jean-Claude Trichet, head of the European Central Bank. The ECB has an explicit inflation target of 2%. The sole goal of monetary policy in the Euro Zone is to control inflation. And yet…the September’s Euro Zone inflation rate was 2.6% (annualized) and things did not improve much in October when the annualized inflation rate was 2.4%. Given that the ECB has not changed rates it two YEARS, clearly a contractionary monetary policy is called for. But there’s the rub…The Euro Zone economies are very weak. While the U.S. economy is humming along at an annual growth rate of around 4.4% (while some in the American press call this a “weak” recovery…more about that later) the Euro Zone is economy is limping along at annual rate of about 2.5%. Higher interest rates will not result in more rapid economic recovery in Euro. In fact one of the few bright spots in Euro Zone has been the export sector. This is especially true in Germany (1/3 of the European economy) where domestic spending is morbid the only growth they are seeing is in exports. Higher European interest rates might lead the Euro to appreciate and thus kill off the European export market, it’s only real source of economic growth. So what is Trichet to do? Many suggest he should remember Paul Volcker’s tenure at the Fed in the late 1970’s. Volcker faced a more daunting task than Trichet, but it is similar: weak to no economic growth, growing unemployment and stubborn increases in the rate of inflation. Volcker’s solution: short term pain for long term gain. By pursuing an extremely unpopular contractionary policy in 1979, Volcker was able to start down the road to controlling inflation and cementing the reputation of the Fed as a strong inflation fighter. Now it is Trichet’s turn. He needs to convince the financial markets that the ECB takes it’s anti inflationary mandate seriously. To be honest, many of the economic growth problems in Europe can not be addressed by monetary policy anyway. Many European economies need to make structural changes in their economies in order to create jobs and spur economic growth. These structural changes need to come at the national level and not from the Central Bank. But the less informed European politicians are quick to blame the ECB for the lack of European growth. They need to look into the mirror. Unfortunately, this is something politicians are not very good at doing. Poor Jean-Claude Trichet.
Economists “predict” strong U.S. Economy. The National Bureau for Business Economics (NABE), a non-partisan association of economists, released results from a survey of members on the near term outlook for the U.S. economy. The general consensus is that Hurricane Katrina had only a minor effect on the ability of the U.S. economy to grow. These economists see the U.S. economy growing at an annual rate of 3.5% for 2005 and 3.4% for 2006.The NABE economists see headline inflation increasing at a pretty fast 3.5% (4th quarter over 4th quarter) BUT they see core inflation at a modest 2.3% for 2005. For 2006 they see baseline CPI increasing at an annual rate of just 2.3% thanks to moderating energy prices. Despite the taming inflation, they see the Fed increasing the target for the Fed Funds Rate to 4.5% by the end of 2006, in part to keep the inflation rate down. Overall 2006 looks like a good year for the U.S. economy. All of this with the caveat that economists are HORRIBLE at predicting the future. All the best, MBrandl
|
|||||||||||||||||||||||||||||||||||||
| | |||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
