Franz was making a statement about interest rate differential between ECB and US.
I shouldn't have used the brief term "G7" since it includes several ECB members, but there are significant differences between Japan, US, and ECB. The 400 basis gap is significant to Japan, so when FED opts for restraint and ECB raises rates, the yen must fall. It's a critical point, since the US can't tolerate yen weakness. Thus the FED can't raise interest rates.
They aren't justified in doing that anyway. The market wants rates to decline as evidenced by the fall in the corporate bond rate. Nonetheless, if ECB persists in raising rates which seems inevitable and since Japan has significant European trade, the 400 difference is linchpin. If JCB effective rate is 1% and ECB is 4.75%, ceteris paribus if ECB raises another 25 basis points, et voila, downward pressure on yen.
The problem with this primitive calculation is that 400 isn't written in stone and is a function of relative efficiency. Assuming the market has relative efficiency between the two in equilibrium which is a reasonable assumption, it may very well be the case that the yen can't stomach much more ECB tightening. The amazing thing is that this causes the yen to adjust downward relative to the dollar, since the dollar is the conversion constant here. A falling yen would mean big trouble.
The US may have to ignore Teitmeyer and let rates fall to the market rate. Actually, they shouldn't be interfering with the damn market anyway. Erring on the side of restraint in order to show how much they are inflation fighters is more pretense. Must be another fool taking a stab at demand management. The fools. |
