(Bloomberg Opinion) -- A once-unthinkable notion is becoming possible: The European Central Bank may start talking about ratcheting back easy-money policies before the Federal Reserve does. Even more curious is that this would not be the result of the usual policy drivers relating to inflation, growth, financial stability and fiscal policy. Rather, it would reflect a Fed-specific duality happening now: Not only does the U.S. central bank appear to be to lagging behind developments on the ground and the emerging consensus among some other central banks, but it’s also being held hostage to a monetary framework that, while designed to capture structural change, risks being ill-suited for the Covid-disrupted world.
The ECB Governing Council, its highest policy-making entity, is scheduled to meet on June 10, a week earlier than the next meeting of the U.S. Federal Open Market Committee (the equivalent at the Fed). In the run-up to this meeting, there’s been some noise from ECB officials about the possibility of policy discussions considering the case for some reduction in the size of its asset-purchase program.
Such possible ECB considerations of a taper would follow actual steps taken this month by the Bank of Canada and the Bank of England. And they would make the U.S. central bank even more of an outlier in the advanced world as Fed officials almost universally reiterate their long-standing message that it is not time yet to even start “thinking about thinking” about a change in the current “pedal-to-the-metal” policy approach.
This emerging contrast cannot be explained away by traditional drivers of monetary policy. If anything, those factors would suggest that the Fed should be ahead of the other central banks in slowly and carefully tightening financial conditions. As an illustration, consider the following:
*Growth in the U.S. is outpacing that in Europe, and is likely to continue to do so for 2021 as a whole;
*Fiscal policy in the U.S. is significantly more expansionary than it is in Europe;
*Inflationary pressures are more pronounced and broad-based in the U.S. than in Europe, and
*There is a greater proliferation in the U.S. of excessive financial risk-taking in non-banks, which poses a danger to future financial stability.
None of these things explain the Fed’s position; in fact, they run counter to it. And yet U.S. central bankers remain fixated on their oft-repeated conviction that inflation is “transitory.” They are holding to this line despite data and corporate evidence that support a more open mindset, and even as other central banks take different approaches and an increasing number of economists and Wall Street analysts voice concern about the Fed’s stance.
Fed policy makers may well end up being correct in their stubbornness to dismiss all this. However, judging from the market action, including today’s selloff in assets that historically do not move together, it’s clear worries are growing about the risk of a policy mistake. After all, one of the last things the economy and markets need is a late Fed that is forced to slam its brakes.
Some central banks in developing countries had already moved to tighten monetary policy but there, the drivers were domestic conditions, such as exchange rates, that do not easily map to advanced countries.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include "The Only Game in Town" and "When Markets Collide."
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