ECB-Fed Exit

How to Avoid a Tantrum

  • Why it matters

    Why it matters

    If the ECB can do a better job of getting the messaging right, it will have more flexibility to tailor its wind-down to the euro zone’s economic conditions.

  • Facts


    • The US central bank has been slowly raising interest rates from record lows over the past two years. Three more rate hikes this year could bring its benchmark rate up to 1.5 percent.
    • The ECB has kept its main refinancing rate at 0 percent and the deposit rate it charges banks in negative territory at -0.4 percent.
    • Mario Draghi has made clear that the ECB will not raise interest rates until it finishes its €60-billion-a-month bond-buying program, which will likely be wound down over the course of 2018.
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G7 Finance Ministers and Central Bank Governors’ Meeting
So, how did that exit work out for you? Source: Bloomberg

The European Central Bank is still injecting massive amounts of cash into the euro zone’s economy. At some point, it will have to stop. The U.S. central bank is already well underway with its pullback and offers lessons on what to do – and what not to do – when the time comes.

At an annual gathering of economists, academics and European central bankers in Germany’s financial capital Frankfurt last week, one word was on everybody’s lips: “Sequencing.”

It’s a technical term for a simple question: How should authorities like the European Central Bank go about exiting from their extremely loose monetary policy since the financial crisis?

German savers, suffering under record low interest rates designed to help revive southern European economies, have been hoping to see the start of it for years – and have so far been frustrated: “A reassessment of the current monetary policy stance is not warranted at this stage,” ECB President Mario Draghi said at the Frankfurt conference, dashing speculation building over the last month that a turnabout may already be on hand.

With those words, Mr. Draghi was also distancing himself from his counterparts across the Atlantic. Janet Yellen, chair of the US Federal Reserve, has been dialing back at full steam over the past two years, raising interest rates off record lows thanks to a US economy that has recovered from the 2008 financial crisis far more quickly than that of Europe.

The time may not yet have arrived for Europe to do the same, but everybody is thinking about it. And the Federal Reserve offers some key lessons on how to go about it when the time comes – lessons that Mr. Draghi is already putting into practice.

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