The Fed and the ECB

A few thoughts as we go into the fed meeting. The Fed mission is well outlined even though the dual mandate takes a ton of criticism in practice. It will be that mission statement that drives policy decisions today, not recent market gyrations. The ECB, loved for its single mandate, actually is in a worse position. The ECB is handcuffed by charter to only deal with liquidity issues in the EU. Solvency is more complex and allegedly some other entity's responsibility. No present structure away from the ECB is large enough to handle a solvency mandate.
In a perfect world, US policy would look like ECB's and the opposite at this juncture. A swap would avoid the crossing paths. The us system can ow handle a liquidity backstop away from the zirp. The problem is no context to get there. Conversely, as the EFSF is bolstered to deal with solvency, the ECB will need to reduce funding costs toward zero. Or, th ECB (since its already robust enough) should embrace mission creep more aggressively.
The Fed is now expected to roll maturing debt into longer dated structures. This is not such an easy game. The low rate environment and market function has already shown to be a detriment to exit strategy scenarios. Counterparties do not appear up to task. Longer durations would make this hypothetical even more tricky. if "exit' is actually "held to maturity", then the shortest duration is the safest (and hopefully quickest) way out.

Leave a Reply

Your email address will not be published. Required fields are marked *