ECB And Federal Reserve Face Similar Challenges As They Walk Economic Tight Ropes

Friday, August 03, 2012 00:53
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ECB And Federal Reserve Face Similar Challenges As They Walk Economic Tight Ropes

Tags: bonds | debt | economy | Federal Reserve

The two leaders of the two largest central banks in the world are walking tight ropes as global markets keep hoping they will act soon to relieve economic pressures. Federal Reserve chairman Ben Bernanke and European Central Bank (ECB) president Mario Draghi face multiple tactical and political challenges as they try to navigate troubled economic waters.

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Draghi has more at stake than Bernanke. Draghi is in the last segment of an eight-year term and faces re- election in three months. The currency under his watch is in danger of unraveling and much of Europe is already in recession.
 
Bernanke still has 17 months left of his second four-year term. Although the economy shows signs of growth, the pace of that growth is too slow to turn employment around.
Both central banks seem poised to add more debt to their portfolios. And both have been aggressively taking steps to stimulate their respective economies for three years with minimal success.
 
The focus of each central bank’s bond buying would be different, however. Bernanke would be buying bonds to reduce mortgage and other costs for the private sector. Draghi is hoping to reduce the extremely high cost of credit—and preserve access to the credit markets—for the governments of Spain and Italy.
 
Draghi has to preserve the euro without, in essence, printing money to finance debt. The ECB charter forbids such action and the Bundesbank stands staunchly opposed to it. The US administration and Congress have so far failed to agree on a budget plan that would provide short-term relief while also addressing longer term structural issues.
 
China is also facing an economic slowdown and echoed the statements of the Fed and the ECB, that it is considering taking action to boost growth. All three governments are saying similar things with little action of late to back them up.

 

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