Lingering doubts about the ECB’s willingness to fight lower prices beg the question: How worried are they about disinflation?
There is some chatter today that policymakers may not be as concerned about low inflation readings as the market believes. One reason is that the ECB and the rest of the Troika has been pushing labor reform in the periphery. That reform means a mix of higher productivity and lower compensation — the latter weighs on prices. Other structural changes are also weighing.
Stephen Jen from SLJ Macro Partners reminds everyone that the ECB is part of the European governing mechanism and before taking drastic steps like QE, it will need to consider the effects on moral hazard and austerity — something that will keep them sidelined.
In the US, meanwhile, there is no policy cohesion. Congress is hapless and the Fed is manufacturing growth by flooding the market with liquidity to compensate. It’s those sort of dynamics that explain the resilience of the euro.
