For much of last year, Ben Bernanke’s activist US Federal Reserve was ahead of the curve, making bold use of the experimental monetary instruments he had conceived as an academic. Across the Atlantic, Jean-Claude Trichet’s European Central Bank was behind the curve – active, but not active enough relative to the crisis it faced. Today’s big question for the world economy can be framed this way: might these roles be reversed?

The European part of this pivot is already half complete. After months of political argument about the details of an emergency liquidity fund worth €440bn, the central bank lost patience and, under the new leadership of Mario Draghi, injected more than twice that into Europe’s banking system. The acronym-strewn arcana of firewall diplomacy were abruptly bypassed. Who cares about negotiations for a bailout fund when the central bank can print one?

Mr Draghi’s intervention solved the acute part of Europe’s problem. What is less well recognised is that the ECB’s new activism could also, if extended, address its chronic ailments. Europe’s periphery remains hobbled by too much debt and too little competitiveness. But if the ECB has the guts to engineer a sustained period of monetary ease – and grit its teeth as German inflation inches up – it can deliver debt relief by the back door and competitiveness via a weaker euro. Rather than waiting for arduous labour reform to make Spanish workers competitive with Germans, a determined ECB could help Spain compete with Thais or Canadians. Mr Draghi has not yet revealed himself to be ready for this further step; but he has already shown a capacity to be radical.

Now consider the US half of this year’s potential role reversal. The Fed has launched two rounds of quantitative easing, one variant known as Operation Twist, and an effort to guide bond yields lower by publishing its policy makers’ forecasts of interest rates. But this month the Fed has apparently backed off. Ten-year Treasury yields have risen 30 basis points as investors read the signals emanating from the central bank and concluded its appetite for stimulus was waning.

The reasons for the Fed’s presumed caution are surely not just economic. Yes, recent jobs reports have been encouraging, but those who trumpet a US recovery should remember that the data looked brighter at this point in 2010 and again in 2011, only to fade later. This time, high petrol prices are likely to damp consumer spending, still struggling with a collapsed housing market. Worse, there is a clear risk of budget brinkmanship in Congress at the end of this year, which will hit business confidence and, in the extreme, result in growth-destroying spending cuts and tax rises. For these reasons, forecasters expect a deceleration from the misleadingly strong growth of 3 per cent in the fourth quarter of 2011.

Moreover, even if growth is higher than expected, the economy will still be operating far below its potential – leaving room for additional monetary stimulus without risk of inflation, which the Fed expects to stay below its 2 per cent target. Admittedly, there is a lively debate about what potential output really is, and the Fed caused inflation in the 1970s because it mistakenly thought the economy was operating below potential. Yet while there is a range of estimates of how much the US can produce, all these are higher than today’s output. The narrow measure of unemployment is still above 8 per cent. Whether the non-inflationary rate is 5 per cent or 6 per cent, the right policy is to keep easing.

The truth is that, if the Fed is backing away from stimulus, the reasons are as much political as substantive. Even in the placid 1990s, Fed policy makers were sensitive to political pressure, and may now be even more so with the poisonous calls to “End the Fed” from gold-huggers in the Republican party. Especially with an election nearing, the Fed does not want to be accused of boosting Mr Obama’s prospects at the expense of sound money.

Last year the ECB fell behind the curve because of inflation paranoia in Germany. This year the ECB has begun to look bolder: it may yet go further as the failure of self-defeating austerity budgets turns yesterday’s inflationary heresy into tomorrow’s logical answer. Meanwhile, the Republican right has managed to create a US version of the German problem. With luck, the Fed will be tough enough to ignore the politics and do the right thing. The longer millions of Americans remain idle, the harder it will be to get them back into the workforce.

The writer directs the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations

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