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Draghi Driving on Easy Street Won’t Bypass Yellen Soon
(Bloomberg) — For the widening U.S.-euro area divide in central bank rhetoric, the policy gap isn’t budging much.
So while Janet Yellen prepares the markets for higher interest rates and Mario Draghi rolls out European-style quantitative easing, U.S. monetary policy remains three times more expansive than the euro area’s, says Michala Marcussen, global head of economics at Societe Generale SA.
The London-based economist at the French bank used a Taylor rule, a tool designed to show the suitable level of interest rates given the economic environment, to conclude that it’s going to take quite a while for the ECB to truly bypass the Fed on easy street.
The more negative the Taylor rule calculation, the easier policy is than conditions suggest it should be. Marcussen’s results show the U.S. rate is below minus 3 percent. In the euro-area, it’s closer to minus 1 percent.
That suggests that even if the Fed meets Societe Generale’s forecast of 75 basis points of rate increases this year, the narrowing of transatlantic stances would be only marginal, she says.
That’s partly because the Fed began its quantitative easing in late 2008, while the ECB will start sometime this year.
A measure of money supply in the U.S. is equivalent to almost a quarter of gross domestic product, compared to less than 15 percent in the euro area. The Fed’s balance sheet of $4.5 trillion is about $2 trillion more than the ECB’s.
Real Yields
While 10-year bond yields are lower in the euro area, accounting for inflation leaves them at about 1.38 percent in the U.S. and 1.64 percent in the euro area.
Marcussen reckons it would take the bulk of Draghi’s 1.1 trillion euro ($1.3 trillion) asset-purchase program to close such gaps and it’s going to take time to deploy that.
Only the euro gives the ECB an advantage. Its trade-weighted value has fallen 11 percent since the start of last year, while the dollar’s has climbed 16 percent.
Nevertheless, the upshot for Marcussen is “even as the Fed tightens we believe the U.S. will enjoy more accommodative monetary policy, than the euro area for some considerable time.”
