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17 September 2015

Wall Street Journal: Fed’s decision could pressure European Central Bank to step up stimulus efforts

The Federal Reserve’s decision to keep interest rates pinned near zero could put added pressure on the ECB to step up its own stimulus efforts to keep the euro’s exchange rate from strengthening too much and derailing Europe’s fragile economic recovery.

The Fed kept interest rates unchanged after a two-day meeting that concluded in one of the most hotly anticipated meetings in years. A recovering U.S. economy with falling unemployment had fanned expectations that the Fed would start slowing raising interest rates. But with inflation still far below the Fed’s 2% target, it stood pat.
The euro rose in an initial response to the Fed’s decision. Tighter monetary policies typically lead to a stronger currency. Late in New York trading, the euro was up 1.3% on the day to $1.1437. Such a response, if sustained, will add to pressure on the ECB to ease policy further in order to keep a stronger euro from upending Europe’s recovery, which still relies heavily on exports. 
“The ECB will now be confronted with a further strengthening of the euro and probably pushed closer to stepping up QE,” said Carsten Brzeski, economist at ING Bank. “To some extent, the Fed’s inaction could force new ECB action.”
“The longer the Fed looks like staying on hold and the bigger the downside risks to growth and markets globally, the greater the likelihood of pressure building for more policy action from the ECB,” said Ken Wattret, economist at BNP Paribas. “We don’t think it will be long in coming.”
ECB officials have recently signaled support for higher U.S. interest rates, if their Fed counterparts deemed this step as needed to achieve maximum employment and subdued inflation.
But higher U.S. interest rates carry risks. If financial markets price in a steady stream of rate increases in the coming months, then long-term interest rates could rise and upend bank lending and investment in Europe.
Full article (WSJ subscription required)

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