After years of “accommodative” monetary policy, the U.S. Federal Reserve is moving, ever so slowly, toward the first interest rate increase in recent memory. At the same time, its counterpart across the Atlantic, the European Central Bank, is fighting an ongoing economic slump by taking a page from the Fed’s book and preparing to pour money into the European economy in an effort to stimulate growth.
The ECB on Thursday announced a Quantitative Easing program similar to the one the Fed recently wound down. The ECB, with the support of individual member countries; central banks, will buy the equivalent of about $52.5 billion in securities per month on the open market in Europe, in an effort to keep interest rates low and spur investment.
Taken together, the Eurozone economies are slightly larger than the U.S. economy, combining to create the largest economic entity in the world. So, what can U.S. consumers expect when the Eurozone floods the market with money?
The answer, surprisingly, is not a whole lot. In part, that’s because the effect will be relatively small, and because the alternative was not economic Armageddon, but simply continued slow growth.
“The effect should be very small because the option of not doing it did not envision a crisis for Europe,” said Barry Bosworth, a senior fellow in economic studies at the Brookings Institution.
“As in the United States,” he said, “the direct effect of QE within Europe will be small—equivalent to 50-100 basis points of interest rate change, and any subsequent impact operating through trade flows on the United States would be even smaller.”
In order to assume a major impact on the U.S., he said, “You would need to hypothesize that a failure to undertake the program implied a collapse of any policy consensus within Europe. That would have a large negative effect operating through the loss of investor confidence, but I don’t think that was at stake.”
That is not to say there will be no effect at all, but it will be felt primarily through the impact on the value of the U.S. dollar.
“From the United States’ point of view, you’ve got to consider what the channels are through which this would work, and the main channel is what it does to the currency,” said Desmond Lachman, a resident fellow at the American Enterprise Institute who previously worked on Wall Street at Salomon Smith Barney, and prior to that at the International Monetary Fund.
“The Fed is moving into a tightening mode at a time when these guys are putting the pedal to the metal,” Lachman said. “They are printing money when the U.S. has stopped printing money.”
By flooding the market with euros, the ECB will likely accelerate the already sharp increase in the U.S. dollar’s value against other global currencies.
“The dollar is just appreciating like crazy, and that is obviously going to have an impact on the U.S. economy,” said Lachman. In addition to putting downward pressure on U.S. prices, he said, “There will be somewhat of a hit to the U.S. because their exports are going to be a lot cheaper than ours in third country markets. We’ll also be importing more from them.
While the effect will not be enormous, Lachman said, “It’s not negligible.” He added, “It might offset a bit the boost the U.S. is getting from lower oil prices. There will be some small hit to the U.S. economy from this.”
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