Tuesday, August 12, 2008
Is Trichet smarter than Bernanke ?
Ben Bernanke is the US Federal Reserve Chairman and Jean Claude Trichet is his ECB (European Central bank) counterpart. Over the last one year they have been moving in the opposite direction while Bernanke is cutting interest rates hard and aggressively, Trichet has been busy raising them in Europe. For US the primary concern so far has been the Slowdown in economy while Trichet is busy fighting inflation. Trichet has so far resisted all the political pressure to reduce interest rates in spite of the massive slowdown in Italy and Spain.
But now the slowdown is spreading all over Europe including France and the strongest European economy of Germany. UK is already battling with massive housing mortgage defaults and consumer credit defaults problem which is more grave than that of US. In such a scenario Trichet can no longer increase interest rates and has to cut them from here onwards, which will lead to fall in Euro.
Bernanke's aggressive rate cut program is on hold right now because of the increased inflation. However I don't think there will be any need to raise interest rates as inflation is easing now with reduction in commodity prices.
Only time will tell whether Bernanke's aggressive rate cuts can avoid a US recession or whether Trichet's aggressive push to control inflation is to be blamed for the mounting European recession.