The Fed is Showing the ECB the Right Path to Take

The Federal Reserve has raised the Federal Funds Rate for the second time this year, increasing the interest rate level to a range between 1.0 and 1.25 per cent. The Fed is also planning to initiate a gradual reduction of its $4.5 trillion balance sheet before the end of the year. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW) in Mannheim, offers his view on the Fed’s actions:

“The Federal Reserve interest rate hike was without alternative. Given the historically low unemployment rate, the Fed had no choice but to normalise the US interest rate level. Their decision to finally start making efforts towards reducing its balance sheet should be welcomed. The Fed is clearly taking the threat of new asset price bubbles in the stock and property markets resulting from the Reserve’s billions of dollars’ worth of purchased securities seriously.

The Fed is thus quite clearly much further along in the learning process than the ECB, which is still seemingly ignoring the dramatic stabilisation of the global economy and the growing risks associated with securities purchases. The Federal Reserve is showing the ECB the right path to take. We can only hope that the European Central Bank will soon follow suit.”

For further information please contact:

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail heinemann@zew.de