We’ve discussed previously the dissent of two Fed voting members of the most recent Fed rate cut in July. This was somewhat unprecedented. Since then we’ve had a suggestion from a former Fed governor that the Fed should shape policy based upon a political agenda. Add to that further disagreements in public by current Fed members over the next step in Fed policy. And the dissension seems to be spreading. On Thursday, the ECB gave up on the idea of normalization and decided to lower already negative rates even further, begin its bond purchases again and abandon its forward guidance timetable in favor of an undefined period characterized by current policy.
It was a big about face for Draghi, who hoped to be exiting the scene in a rising rate environment. While it seemed to us that this was quite a powerful statement akin to the previous “whatever it takes” mentality, the markets were nonplussed. Some said, too little too late. Others, wondered whether it was really necessary. Most notably among them, some very powerful ECB governors including German, French and Dutch ministers who pressed against the idea of a resumption of bond purchases. According to Bloomberg, those three governors alone represent roughly half of the euro region as measured by economic output and population.
They were joined by Austria and Estonia, as well as members on the ECB’s Executive Board. However, none of these governors got a vote. In fact, no vote was taken, which would have been a rare occurrence and outside of typical ECB practice. For his part, Draghi described the final decision as having very broad consensus and not needing a vote. Nonetheless, it was a level of public disagreement that has rarely been seen since Draghi took the reins eight years ago.
Does this disconcerting process of decision making call into question the legitimacy of this financial institution as we view is being done by some in the US with the Federal Reserve? We think it problematic in an increasingly fractious European Union and — much like in the US — deals another blow to market confidence.
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