Mario Draghi Sends His Love and Thanks to Jay Powell

(Bloomberg Opinion) -- Jerome Powell’s half-hearted rate cut on Wednesday incensed President Donald Trump, who immediately took to Twitter to say the chairman of the U.S. Federal Reserve had “let us down”. Global equities sunk and the dollar strengthened as Powell chose to cut rates by a quarter- rather than a half-point and said this wasn’t the start of a “lengthy cutting cycle.”

But the Fed’s cautious easing will have won Powell a friend on the other side of the Atlantic. Mario Draghi, the European Central Bank’s chief, is preparing a major stimulus package for September to counter a deepening slowdown in the euro zone economy. Thanks to the Fed chairman, the ECB can now enjoy the fruits of a weaker euro against the greenback, which will provide some assistance to Europe’s ailing manufacturing sector.

The slight divergence between the two central banks on galvanizing their economies is entirely justified. Trump may have wanted Powell to go gangbusters on monetary policy but the U.S. economy is really not doing that badly. It expanded 2.3% in the three months through June compared to the same period last year. While that’s less than the 2.7% jump in the first quarter, U.S. unemployment still stands well below 4% and consumer spending is resilient.

The euro zone economy looks more fragile. The currency area expanded by 1.1% year-on-year in the second quarter as Trump-stoked trade tensions weighed on the region’s exporters. Italy stagnated on a quarterly basis and even France and Spain disappointed. The ECB is struggling to meet its inflation target of below but close to 2%. Core inflation, which strips out more volatile items, fell to 1.1% in July from 1.3% in June.

Powell felt the risks around the U.S. outlook were sufficient to justify what he called a “mid-cycle adjustment.” This assessment may have disappointed investors but it appears fair. The Fed can always choose to cut the federal funds rate from their new level of 2%-2.25% later if the economy weakens. Meanwhile, Powell has shown he won’t cave in to the president’s Twitter rage.

Draghi has a much tougher battle on his hands. The ECB has the tools it needs to support growth and inflation, starting with further rate cuts and (if needed) the restarting of net asset purchases. But Draghi steps down at the end of October, with the International Monetary Fund head Christine Lagarde taking over. The Frenchwoman has formidable political skills but there are questions about whether she’ll be able to  convince the ECB’s governing council – which includes the euro zone member states’ central bankers – to deliver adequate monetary stimulus in the future. The euro area clearly needs fiscal support too from its strongest members, especially Germany, but Berlin is unconvinced.

Of course, a weaker euro won’t solve the region’s difficulties on its own. Trump, not Powell, is the American who could do the most for the European and U.S. economies if he chose to end his reckless trade conflicts with China and the European Union, which have been so damaging for global growth. But at least Draghi knows he can count on a level-headed and independent Fed, which doesn’t succumb to political pressure just for the sake of weakening the dollar. At a time of recurring bad news, this shouldn’t be dismissed.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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