Bob Moon: Knuckle down, or knuckle under? That tough choice still confronts a list of European countries, struggling to keep up with payments on their public debt and pensions. Portugal has finally asked for a bailout from the European Union.
Still, in spite of the fragile situation there and elsewhere, today the European Central Bank made it more expensive to borrow. For the first time since the global financial crisis, it raised interest rates in order to curb inflation. Contrast that with our own Federal Reserve — it’s refused to raise interest rates, and doesn’t see inflation as a major risk.
Our New York bureau chief Heidi Moore explains why Europe and the U.S. are taking different paths.
Heidi Moore: We all know that people come with some emotional baggage. So do major economies. Europe still carries the scars of runaway prices before World War I.
Quincy Krosby: The Germans remember what happened when the Germans went to buy bread with baskets of money. They are never going to allow that to happen again. It’s very much embedded in their psyche.
That’s Quincy Krosby, a market strategist for Prudential Financial. She says inflation is public enemy number one in Europe. Right now, it’s at 2.6 percent — too high for the European Central Bank. That’s why it raised interest rates today, to cool down economic growth enough to keep prices low.
The Federal Reserve has a different kind of baggage — 13.5 million unemployed Americans. The Fed has two jobs: It not only has to keep inflation down, it also has to control unemployment. Zane Brown is a fixed income strategist with Lord Abbett.
Zane Brown: One of the concerns the Federal Reserve has is that if they raise rates, it makes it even more difficult for us to create jobs.
That’s because higher interest rates make it harder for companies to borrow. The Fed wants companies to borrow so they can expand and start hiring.
Brown: Banks just aren’t lending very much money. We all know the Fed has created a lot of money, but it’s just sitting there in a big blob.
Brown says that the Fed would like to see the workforce grow by 300,000 new jobs a month before it shifts its priorities. Even though U.S. officials are openly divided on inflation, Brown doesn’t expect the Fed to even think about raising interest rates until 2012.
In New York, I’m Heidi Moore for Marketplace.
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