Friday, December 5, 2014

Great: The Fed and The ECB Can't Agree On What The Oil Shock Means

Economics is a science my ass.
From Gavyn Davies blog at the Financial Times:

The Fed and ECB differ sharply on the oil shock 
The FT’s Martin Wolf has said almost everything that needs to be said about the global economic effects of the 2014 oil shock, but one additional point is worth emphasising. This is the fact that the US Federal Reserve and the European Central Bank view the consequences of the oil shock entirely differently. The markets have, of course, already been acting on this assumption, but the extent of the gulf between the world’s two leading central banks on this issue has been underlined by Mario Draghi’s dovish speech last month, and particularly by the Fed vice-chairman Stanley Fischer in a somewhat hawkish interview with The Wall Street Journal.

In perhaps his most significant statement since becoming vice-chairman in May, Mr Fischer made it clear that the period of low inflation due to falling oil prices will not deter the Fed from starting to raise interest rates next year. Furthermore, he suggested that the Fed might soon drop the assurance that it would not raise rates for a “considerable time”, replacing it with alternative language that is less constraining on its future actions.
It now seems likely that this language change could happen at the next Federal Open Market Committee meeting on December 16 and 17. By contrast, Mr Draghi and his supporters at the ECB clearly view the oil shock as a reason to shift policy in a more expansionary direction – if not at Thursday’s policy meeting, then sometime fairly soon.


Why do the Fed and the ECB view the oil shock so differently, and can they both be right in their opposite interpretations of how it should affect policy?

One factor that the two central banks may disagree about is the cause of the drop in oil prices. The ECB said in its latest monthly bulletin that the shock has been caused by a mix of supply and demand side factors in the oil market. To the extent that weaker global demand for oil has been a factor, then it is natural for central banks to react by easing policy....MUCH MORE
HT: FT Alphaville's Further Reading linkfest

I may have been too harsh with the one line intro.
In real science the trail of disagreements is mighty long, from phlogiston to eugenics to plate tectonics to a couple dozen other biggies.

One of my favorites was recapitulation theory encapsulated in Haeckel's Lie:
Ontogeny Recapitulates Phylogeny
which I played off of in a series of post headlined
Scripophily Recapitulates Philately
and which were pretty funny but which could also be used as proof of derangement should anyone really push the competency issue.
As could repeated use of the word 'which'.