The unsyncopated rhythm of central banks

April 11, 2011

The European Central Bank is off and running with its tightening cycle — raising by 25 basis points last week and talking in tongues enough to persuade markets that another hike is coming by July.  At the same time, the Fed — despite some hawkish comments recently about QE — isn’t seen actually tightening for some time. Next year, actually.

Bank of America-Merrill Lynch is now wondering whether there is something wrong with this. ” Surely one of these central banks is heading to a painful policy mistake? ” it says.

Key to the question is the fact that U.S. and euro zone economics are not as far apart normally as one might think. Take growth, where there is a 0.6 positive correlation between the two across business cycles. Or inflation. The correlation there is even greater at a positive 0.75 over a whole economic cycle.

So the two economies are pretty correlated. But the United States is usually ahead in changing gears with monetary policy, with the ECB — and its economy — lagging.

BofA -Merrill notes that this pattern was shattered last week when the ECB went first. “Assuming both central banks continue to be as responsive to growth and inflation as they have been in the past,” it writes, “the ECB’s sprint ahead of the Fed suggests something fundamental is no longer in sync.”

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see