A growing divergence between the U.S. Federal Reserve and the European Central Bank monetary policy could lead to some major consequences internationally, according to Mohamed El-Erian.
In a Project Syndicate column titled “The Great Policy Divergence,” El-Erian addresses his worries about the international repercussions as the Fed and the ECB are likely to put in place notably different policies over the next few weeks.
While the Fed seems set to raise interest rates for the first time in almost 10 years when its policy-setting Federal Open Market Committee meets on December 15-16, the ECB meanwhile is expected to introduce additional measures to drive rates in the opposite direction.
“As the Fed normalizes its monetary policy and the ECB doubles down on extraordinary measures, we certainly should hope for the best,” El-Erian, Allianz’s chief global strategist and PIMCO’s former CEO, writes. “But we should also be planning for a substantial rise in financial and economic uncertainty.”
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The effects of this growing divergence can already be seen, according to El-Erian.
“Already, the interest-rate differential between ‘risk-free’ bonds on both sides of the Atlantic – say, US Treasuries and German Bunds – has widened notably,” El-Erian writes. “And, at the same time, the dollar has strengthened not only against the euro, but also against most other currencies. Left unchecked, these trends are likely to persist.”
He narrows in on three “major” issues that should be monitored over the coming months:
1. El-Erian says the U.S. is unlikely to stand by for long if its “currency appreciates significantly” and its “international competitiveness deteriorates substantially.”
“Companies are already reporting earning pressures due to the rising dollar, and some are even asking their governments to play a more forceful role in countering a stealth ‘currency war,’” he writes.