The U.S. Federal Reserve's landmark shift to a more tolerant stance on inflation will be a drag on the dollar for years and will raise hard questions about the role of central banking, challenging policymakers from Frankfurt to Tokyo.
FRANKFURT - The U.S. Federal Reserve’s landmark shift to a more tolerant stance on inflation will be a drag on the dollar for years and will raise hard questions about the role of central banking, challenging policymakers from Frankfurt to Tokyo.
The second, more immediate concern will be the dollar's weakness, which hurts exporters from Europe to Asia. This is bound to feature prominently at the European Central Bank's policy meeting on Thursday, as a strong eurowill make it more difficult for exporting nations in the euro zone to climb out of their deepest recession in living memory.
“If there are forces moving the euro/dollar rate around, that feeds into our global and European forecasts and our monetary policy setting,” Lane said. Both have cut rates into negative territory and yields are already negative for much of the curve. Both banks also face some domestic opposition to more easing, making further moves politically complicated.
Some economists argue that the ECB should simply shift to a similarly flexible target as part of its own ongoing policy review. But markets price no rate hike at all during Christine Lagarde’s eight-year term atop the bank, so a suggestion that policy tightening would be even further pushed out raises credibility issues.
The ECB also appears keen to reinterpret its mandate with Lagarde arguing that risks created by climate change are so big, the bank could not ignore them.
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