Thursday, January 10, 2008

Central Bankers Out of Phase?

In a remarkable flexing of central-banker muscle, Jean-Claude Trichet threatened today to raise interest rates "pre-emptively" if employers and unions do not hold the line on wages in current negotiations. By contrast, in the US, Ben Bernanke promises to become even more aggressive in lowering interest rates:

In total, therefore, we have brought the funds rate down by a percentage point from its level just before financial strains emerged. The Federal Reserve took these actions to help offset the restraint imposed by the tightening of credit conditions and the weakening of the housing market. However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary. The Committee will, of course, be carefully evaluating incoming information bearing on the economic outlook. Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

As when warm moist air meets dry cold air, one should expect turbulence ahead. And one should expect renewed attacks on the European Central Bank, not least from Nicolas Sarkozy.

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