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ECB Move Highlights Differences Between Eurozone, U.S. Economies

The European Central Bank’s decision Thursday to lower its key interest rate further below zero while relaunching an asset-purchase program means monetary policy in Europe is now even more stimulative than in the U.S.

That prompted a strong response from President Trump, who complained in a tweet that the ECB is weakening the euro against the U.S. dollar and thus “hurting U.S. exports,” while the Federal Reserve “sits, and sits, and sits.”

The Fed cut its benchmark rate by a quarter percentage point in July and is poised to do so again next week, which would lower the rate to a range between 1.75% and 2%. That would be well above the ECB’s key rate, which will drop to minus 0.5%.

Behind this divergence: The U.S. economy is stronger than the eurozone’s, which means there is less reason for the Fed to boost growth.

“It’s not an enviable situation to be in to have negative interest rates, ” said Torsten Slok, chief economist for Deutsche Bank Securities. “Europe has negative rates because the economy is weak.”

Here are five charts that highlight the differences in the two economies.

Economic Growth

First, overall economic growth has been stronger in the U.S. than in Europe since mid-2017. While growth faltered in the eurozone beginning in the first quarter of 2018, it has remained solid in the U.S.

Inflation

A central bank’s main job is to maintain slow and steady inflation to keep the economy humming along. The Fed targets a 2% rate while the ECB seeks a level close to but just under 2%. Inflation has been weak in both economies lately but it has come closer to the Fed’s goal.

Manufacturing

The global economic slowdown has had a bigger effect on manufacturing in the eurozone, which is more export-driven. That has contributed to Europe’s weakening economy and helped spur the ECB’s latest move.

Borrowing Costs

Faced with the sluggish economy, European investors are seeking safety in European government bonds, pushing up their prices. That, combined with the large portfolio the ECB has accumulated through its asset purchases, has pulling yields in several eurozone countries into negative territory, well below the yield on U.S. government debt. Bond yields fall as prices rise.

Currencies

The stronger U.S. economy has attracted investment from overseas. That has pushed up the value of the dollar against other currencies, including the euro.

President Trump has criticized the Fed for not cutting rates more to weaken the dollar, which would benefit American exporters. He pressed the Fed in a tweet Wednesday to cut short-term rates to “”ZERO, or less.”

But the relatively solid U.S. economy means that could be risky. It could cause the economy to overheat and inflate dangerous asset bubbles that might burst and harm the economy.

Fed Chairman Jerome Powell said this month the U.S. economy “is in a good place,” adding that the central bank would “act as appropriate” to keep the expansion going. But the U.S. economy’s resilience means the Fed is unlikely to push rates below zero soon.
Source: Dow Jones

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