Monetary policy of the ECB: America as a model

In the spring of 2013, the then chairman of the US Federal Reserve, Ben Bernanke, announced that the Fed intends to gradually reduce the volume of its bond purchases, which have been ongoing for several years, in the wake of the economic recovery. The result was sharp price losses not only in the American bond market, but also in bond markets in other countries, which surprised the Fed. This episode, known as the "Taper Tantrum", left its mark not only on American monetary policy, which only temporarily and modestly reduced its extensive bond holdings in the years that followed.

Two insights can be derived from this episode.

The long dominant role of American monetary policy for monetary policy in other countries and currency areas still exists.

Added to this is a real fear of monetary policy of undesirable reactions in the financial markets, which justifies the growing dependence of monetary policy on the participants in the financial markets.

Experts speak of "financial dominance".

The "Greenspan Put" is still in place today

It has its origin in the implicit assurance of former Fed chairman Alan Greenspan that American monetary policy will do everything possible to prevent distortions in the financial markets. This so-called "Greenspan Put" still shapes monetary policy in many countries today. Since inflation has no longer played a significant role in the past few decades, more and more participants in the financial markets consider the central banks to be allies who are supposed to guarantee them attractive returns and low interest rates for borrowers. Under the heading of “favorable financing conditions”, this has become a mantra of modern monetary policy. The central banks may still think they are pushing, but they have long been pushed.

In this context, it is not surprising that the European Central Bank wants to take every opportunity to continue to pursue an expansionary monetary policy, even if resistance is expressed in the Central Bank Council. The uncertainty about further economic development associated with the delta variant of the virus serves Christine Lagarde as a reason to press ahead with a monetary policy, the example of which can be seen in the United States. The Fed continues to buy securities there as if the American economy were in a serious crisis. In fact, despite the current uncertainty, it is still experiencing a strong economic upswing.

However, the central banks and the participants in the bond markets have successfully persuaded each other that the current higher inflation rates - in America at least 5.4 percent - should only be viewed as a temporary phenomenon. The fall in the yield on US government bonds from 1.70 to 1.30 percent is in any case not compatible with the expectation of rising inflation rates. Even the Bank for International Settlements, actually known as a warning against an overly expansionary monetary policy, is currently rather calm about possible inflation risks, even if it recommends vigilance.

With a view to the lower economic growth potential, but also in view of the oppressive indebtedness in some countries, the European Central Bank not only oriented itself on the American model, but also tried to outperform the Americans. The ECB started its bond purchase programs much later than the Fed, but unlike the Fed, it also introduced negative interest rates. While the Fed's most recent strategy review focused on the distribution of income and wealth and the disadvantage of certain population groups, the ECB sees itself as a fighter against climate change.

If higher inflation rates remain a temporary phenomenon, central banks will be able to continue their current policies for a long time. The result would be a transformation of authorities, which were once fixated on fighting inflation, into institutions that are democratically increasingly dubious and that assign their responsibilities to themselves, but at the same time hang on the leash of powerful participants in the financial markets. The side effects of this monetary policy are not only economic but also political. If a market economy is important to you, that cannot be a good thing.