LONDON: Mario Draghi has opened a door. Janet Yellen has to decide whether she wants to walk through.
The European Central Bank president signaled last week that policy on his side of the Atlantic is going on hold as officials wait to see how their stimulus measures play out. That pause may hand the Federal Reserve chair an opportunity to raise interest rates in coming months, by reducing the risk of a sharp rally in the dollar if the policies of the two central banks conspicuously diverged, reports Bloomberg.
“The reality for the ECB is the euro zone isn’t in nearly as bad a shape as Draghi would like to make out—it pushes the currency and gives the Fed far more room to move,” said Rob Carnell, chief international economist at ING Bank NV in London. “Sometime in the third quarter sounds like a reasonable bet for me but I wouldn’t rule out the second quarter.”
Investors see zero probability the Federal Open Market Committee will hike at its April 26-27 meeting and only a 20 percent chance of a move at its gathering in June, eight days before Britain holds a referendum on whether to remain in the European Union. A vote by U.K. citizens to depart could trigger financial-market turmoil and is a source of uncertainty that may give the Fed pause. The likelihood of a move in July is 34 percent, according to prices in federal funds futures contracts.
U.S. policy makers expect to raise rates twice this year, according to projections they updated in March. A gradual recovery in the euro area that supports an appreciation in the single currency will strengthen their case, though the U.S. economy still faces obstacles.
At the start of the year, the dollar reached the highest level since 2002 in trade-weighted terms, but has eased back from that peak and the U.S. currency has also lost ground against the euro. A stronger dollar has been a factor in holding down too-low inflation through cheaper import prices as well as denting growth by hurting exports.
Stefan Schneider, international economist at Deutsche Bank AG in Frankfurt, said the ECB’s shift into holding mode makes it easier for the U.S. central bank to tighten monetary policy, though he doesn’t see the move coming soon. “The Fed has a bit more leeway because the dollar strength cited by Yellen as an argument for caution has ebbed recently,” he said. “But the economy doesn’t currently give the Fed any reason to rush.”