ECB’s Draghi sends love and thanks to Powell

Jerome Powell’s half-hearted rate cut incensed President Donald Trump, who immediately took to Twitter to say the chairman of the US Federal Reserve had “let us down”. Global equities sunk and the dollar strengthened as Powell chose to cut rates by a quarter- rather than a half-point and said this wasn’t the start of a “lengthy cutting cycle.”
But the Fed’s cautious easing will have won Powell a friend on the other side of the Atlantic. Mario Draghi, the European Central Bank’s chief, is preparing a major stimulus package for September to counter a deepening slowdown in the euro zone economy. Thanks to the Fed chairman, the ECB can now enjoy the fruits of a weaker euro against the greenback, which will provide some assistance to Europe’s ailing manufacturing sector.
The slight divergence between the two central banks on galvanising their economies is entirely justified. Trump may have wanted Powell to go gangbusters on monetary policy but the US economy is really not doing that badly. It expanded 2.3 percent in the three months through June compared to the same period last year. While that’s less than the 2.7 percent jump in first quarter, US unemployment still stands well below 4 percent and consumer spending is resilient.
The euro zone economy looks more fragile. The currency area expanded by 1.1 percent year-on-year in the second quarter as Trump-stoked trade tensions weighed on the region’s exporters. Italy stagnated on a quarterly basis and even France and Spain disappointed. The ECB is struggling to meet its inflation target of below but close to 2 percent. Core inflation, which strips out more volatile items, fell to 1.1 percent in July from
1.3 percent in June.
Powell felt the risks around the US outlook were sufficient to justify what he called a “mid-cycle adjustment.” This assessment may have disappointed investors but it appears fair. The Fed can always choose to cut the federal funds rate from their new level of 2 percent-2.25 percent later if the economy weakens. Meanwhile, Powell has shown he won’t cave in to the president’s Twitter rage.
Draghi has a much tougher battle on his hands. The ECB has the tools it needs to support growth and inflation, starting with further rate cuts and (if needed) the restarting of net asset purchases. But Draghi steps down at the end of October, with the International Monetary Fund head Christine Lagarde taking over. The Frenchwoman has formidable political skills but there are questions about whether she’ll be able to convince the ECB’s governing council — which includes the euro zone member states’ central bankers — to deliver adequate monetary stimulus in the future.
Of course, a weaker euro won’t solve region’s difficulties on its own. Trump, not Powell, is the American who could do the most for European and US economies if he chose to end his reckless trade conflicts with China and European Union, which have been so damaging for global growth. But at least Draghi knows he can count on a level-headed and independent Fed, which doesn’t succumb to political pressure just for sake of weakening the dollar. At a time of recurring bad news, this shouldn’t be dismissed.

—Bloomberg