Rehn Sees Consequences for ECB Policy From Fed’s Goal Change

The Federal Reserve’s decision to change its inflation goal will have consequences for the European Central Bank, Governing Council member Olli Rehn said.

The Finnish central banker said his interpretation of the Fed’s new approach, unveiled by Chairman Jerome Powell at the end of August, is that it will respond more emphatically to inflation rates that are below target, while being more tolerant to risks signaling a rise in price pressures.

“The Fed’s new strategy will inevitably also have an impact on the operating environment of the ECB’s monetary policy -- we are not operating in a vacuum,” Rehn wrote in a Bank of Finland bulletin on Thursday. “The ECB’s strategy review is thus even more necessary than before.”

The Frankfurt-based central bank’s first comprehensive review in almost two decades was started by President Christine Lagarde before being delayed by the coronavirus pandemic. It covers a wide range of topics including the inflation goal -- currently “below, but close to, 2%” -- with the first results expect around the middle of next year.

Rehn’s comments come after the ECB’s former chief economist, Peter Praet, last week urged the institution to accelerate the review in the wake of the Fed’s decision, which he said has contributed to the euro’s recent rally to the strongest level in more than two years.

Lagarde said last week her institution is restarting the strategic overhaul after the initial delay. Price stability will be the key focus, which she called “a cornerstone of any strategy of any central bank around the world.”

©2020 Bloomberg L.P.

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