Federal Reserve & Interest Rates

European Central Bank president, Jean-Claude Trichet made it clear that inflation is a top concern. He was firm in stating that rather than cut rates, the best move is to concentrate on keeping inflation low, unlike the U.S. Federal Reserve which cut rates sizably on Tuesday. European investors’ hopes of a rate cut by the ECB have, for now, been diminished. Trichet believes that taming inflation will help soothe the markets as well.

One major difference in the role of the European Central Bank in contrast the our Federal Reserve is that their responsibility is to keep tight reigns on inflation. The United States Fed has the legal responsibility to promote employment as well as balance inflation.

Yesterday in his Keynote Address to the European Parliament, ECB president Trichet stated:

I trust that in all circumstances, but even more particularly in demanding times of significant market correction and turbulences, it is the responsibility of the Central Bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets. Also important is for the Central Bank to ensure an orderly functioning of the money markets at the level of interest rates required for anchoring the inflation expectations.

Jean-Claude Trichet also implied that different actions might be necessary should economic conditions change or crisis arises. He stated:

In order to ensure effective crisis management and resolution at the EU level, it is crucial that all responsible authorities maintain a high degree of preparedness to handle the complexity of a cross-border crisis situation, while preserving the necessary flexibility of action. Every crisis situation is unique and the arrangements for crisis management and resolution cannot anticipate the full range of causes, propagation channels and outcomes of financial disturbances.

Investors speculate that the European Central Bank will need to cut interest rates later this year. The U.S. economy might impose a slight downward pull to the global markets. If the European economy gets an ease in core inflation they may have the opportunity to reduce interest rates. Trichet believes that it is currently in the best interest of the economy to maintain the current rates.