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Friday, June 06, 2008

What if Trichet truly admires Volcker?

Are we going to see a rate policy divergence between the Fed and ECB? For much of the first half of 2008, investors have been talking that ECB sooner or later will cut rates to follow the steps of the Fed.

But maybe one fact was neglected. Unlike the Fed's dual mandate, ECB has the single mandate of fighting inflation. This makes sense especially when I consider: What if President Trichet is a truly admirer of Paul Volcker, a.k.a inflation fighter to bring down inflation no matter what?

Will dollar's further downfall and the possibility that Gulf countries unpeg dollar eventually pressure Bernanke to adopt similar policy stance? Let's wait and see.

But bear in mind, monetary policy 101, something we have learned in the past several decades, tells us maintaining price stability is the No. 1 priority for the central banks. Yes, no matter what.