2 cheers for ECB’s Praet, 0 for NYFed’s Dudley

A James Alexander post

Two interviews on 26th August showed up a chasm between the ECB and
the NY Fed, reflecting very badly on the Fed. What a difference a few
years makes. Draghi will be popping over to Yellen to tell her what to
do soon.

Peter Praet, ECB Board Member and Chief Economist said:

“There should be no ambiguity on the willingness and ability of the
governing council to act if needed … . The [asset-buying programme]
provides sufficient flexibility to do so in terms of size, composition
and length of the programme.”

NY Fed Governor and member of the Federal Open Market Committee William Dudley said:

“At this moment, the decision to begin the normalization process at
the September FOMC meeting seems less compelling to me than it was a
few weeks ago, [but an initial rate hike] could become more compelling
by the time of the meeting as we get additional information on how the
U.S. economy is performing and (on) international financial market
developments, all of which are important to shaping the U.S. economic
outlook.”

Dudley was only in damage limitation mode after the FOMC had actively, if only “slightly” in their eyes, tightened monetary policy with this comment in the minutes release on 19th August :

“To further reflect the Committee’s assessment that economic conditions had continued to progress toward its objectives, the Committee slightly altered its characterization of when it anticipates that it will be appropriate to begin the process of policy normalization.”

What is normal? Normal is a healthy economy growing well. Sure,
tighten policy when the economy is growing too fast, when expected
NGDP growth is 7% of something (ideally having made up for past below
trend misses). FWIW the average of the two volatile numbers for 1q and
2q 2015 is a very dull 3.7%. Tightening before excessive growth is not
normal, and will send that 3.7% lower. Dangerously low.

These central banks are too inflexible. At least the ECB is
inflexible in a good way at the moment, atoning for mulitple past
sins. The Fed is now insanely focused on “normality” rather than
prosperity. Until the Fed drops this weird obsession, the current
turmoil will not end well. I’m backing Europe.

One thought on “2 cheers for ECB’s Praet, 0 for NYFed’s Dudley

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