ECB and Federal Reserve: Tale of Two Central Banks


Global markets have been characterized by broad optimism for most of the last year, and this can be visualized in the price charts of most stock exchanges around the world. Key benchmarks like the S&P 500 have consistently posted new record highs and this activity has been a rising tide that has lifted all boats.

In more exact terms, this means that emerging markets and developed markets have seen positive trends as consumer spending is improving in most parts of the world.

But one aspect that is missed in many cases when these stories are discussed is the role of central banks, and the influence that these bodies can have in the world economy. Activity here can also have a broad influence on the financial markets and the ways that investors approach their asset savings strategies.

Most analysts would suggest that the main role of a central bank is to define monetary policy through interest rate changes. Currently, there are several issues facing the Federal Reserve and the European Central Bank (ECB) in making their next decisions.

Janet Yellen and the Federal Reserve

In the United States, a growing economy that continues to improve after the 2008 financial crisis has reached a point where it has become prudent to reign in consumer spending with higher interest rate policies. Fed Chair Janet Yellen has made this clear in several public statements and this could continue in the next few weeks as more of these meetings are scheduled.

The main issue here is whether or not higher interest rates will limit consumer spending in ways that make it difficult for companies to hire new workers.

As always, there is a constant ebb and flow here and this is why the job of a central banker is never easy. Stock markets and currency values are almost always impacted by these types of policy changes and so if you are someone that has your savings tied up in investment markets or its trading CFDs as part of your portfolio, it is a good idea to remain cognizant of developments here as they unfold.

Mario Draghi and the ECB

In Europe, the situation is somewhat different as the disjointed regional economies continue to show varying degrees of progress in their own economic recoveries. Areas like Greece, Spain, and Portugal remain mired in a sovereign debt crisis that is still significant and this has contributed to rampant unemployment levels in many regions of the Eurozone.

At the same time, the ECB is seeing its currency values surge relative to the British Pound as the aftermath of the Brexit vote is still impacting those sections of the financial markets. Many analysts actually expect the ECB to intervene in the foreign exchange markets in order to stem the rising values of the Euro relative to its UK counterparts.

Impact on the World Economy

Any decisions made by these two central banks will have a drastic influence on the world economy heading into next year. Most likely to be impacted with be the figures seen in the international export data, and so the next policy maneuverings to be taken by the ECB and Federal Reserve should continue to remain relevant in most of the world’s news headlines.

Richard Cox is a syndicated writer with a PHD in macroeconomics and experience teaching the subject at the university level. He writes on a range of issues in the fields of geopolitics and the financial markets.