ECB Under Pressure to Follow Fed

The US Fed is increasing its balance sheet by another $1 trillion, including $300 of Treasury bonds.

The Euro against USD appreciated after the Fed’s move in more aggressive MBS and Treasury purchase, it put Europe in a disadvantage situation as strong Euro may hurt this export-oriented economy.

The ECB is hemmed in by European Union rules that forbid it from buying bonds directly from governments and any decision to buy debt in the open market may spark a dispute over which country’s securities to purchase. So it is very unlikely that next week the ECB will follow the Fed in deploying traditional quantitative easing measures. Instead ECB may probably cut its main rate, buying more time to figure out how to implement quantitative easing in the more complex euro-zone setup.

As the exchange for Euro against USD can be expected to decline after this possible move by ECB, the resurgent inflation may strike sooner than expected. An over-inflationary monetary or fiscal policy could quickly produce accelerating inflation even while recession persists. And it will cause a big headache for ECB if it really happens.