- We explore how ECB QE will affect the US and how the Fed may respond.
- OECD simulations suggest there will be a mild benefit to world growth from EUR depreciation and lower eurozone rates.
- However, those simulations suggest that in the short run, higher eurozone growth will come largely at the expense of lower growth elsewhere, due to the exchange-rate effect.
- EURUSD is down by 17% from year-ago levels and USD/JPY has shifted by about the same amount. Not all of this is attributable to ECB QE, however; we would estimate around 10pp.
- The US will see slightly lower growth and inflation than otherwise, but will lose a lot less than countries with closer eurozone trade ties. Remember, it is also gaining from lower oil prices.
- US exports to the eurozone make up only 1% or so of US GDP. In the UK and most of Europe outside the euro area, the corresponding figure is roughly 10 times that, if not more.
- This is because trade accounts for a much greater share of GDP in those economies than in the US and the eurozone accounts for a far bigger share of their overall trade.
- We use OECD simulations to calculate that a 10% euro depreciation could reduce inflation by 0.1pp a year in the US and GDP growth by roughly the same amount.
- The Taylor rule suggests the US fed funds rate should be 20-25bp lower than otherwise on account of this.
- Taking into account the spill-over effects of lower bond yields, higher equity prices and third-country policy easing, the need for lower US policy rates due to ECB QE may be even smaller.
- Other central banks have responded quickly to the ECB move, but the eurozone matters a lot more to them as a trading partner and competitor than it does to the more closed US economy.
- ECB QE could make the Fed more sensitive to hints of softer growth or inflation, but objectively, it’s no big deal. It will not change the Fed’s medium-term view or shift the broad thrust of policy.
- To the extent that QE leads to higher eurozone inflation, the initial competiveness benefit will erode over time. Moreover, QE reduces adverse tail risk in the eurozone and benefits the US.
- Both reinforce the case for a limited response from the Fed
