With the FOMC having shown its hand, focus now turns to the ECB – to see what Mr Draghi meant when he said that the ECB would do ‘whatever it takes’…
Much comes down to the question — is the ECB the Bundesbank?
A little bit of history sheds some light on why this is the appropriate question. For the Bundesbank so loved its hard money that it broke the prior attempt at a currency union in Europe — a friend pointed out this quote from More Money than God
On September 5 and 6, European Community finance ministers and central-bank officials met in the pretty English town of Bath. Desperate to create space for lower British interest rates, and egged on by Italian and French counterparts who were also battling recession, the British finance minister, Norman Lamont, pressed repeatedly for an easing of German monetary policy. He banged his fist on the table and shouted at Helmut Schlesinger, the Bundesbank president: “Twelve finance ministers are all sitting here demanding you lower your interest rates. Why won’t you do it?”
Schlesinger was so shaken that his first instinct was to walk out. He prized the independence of the Bundesbank, to which he had devoted his career; he resented political pressure, especially from a foreigner. When Schlesinger eventually recovered his composure, he ventured that, although he didn’t plan to cut interest rates, he saw no reason to raise rates, either. Lamont seized upon this statement and presented it to the media as a concession, even though nobody expected interest rates to rise anyway.
The Bundesbank president felt compelled to correct the impression that he had compromised his institution’s independence. On September 8, after a central bankers’ gathering in Basel, Schlesinger declared publicly that he could make no guarantees about the future course of interest rates. Far from conceding that Germany would modify its monetary policy to make life easier for its neighbours, he warned that he had little confidence in the fixed relationships among European currencies. As if to underline the point, Schlisinger alluded particularly to the unsoundness of the Italian Lira.
With the Fed holding fire last night, i think that risk markets need something super from Mario…