Fed blunders under spotlight as ECB stands tall

PARIS, Jan 23, 2008 (AFP) – A stunning interest rate cut by the US Federal Reserve, followed by a clear signal from its European counterpart that it would not follow suit, illustrates sharp differences in the operating mandates of the two central banks.

In Washington Tuesday, the Fed rode to the rescue of global stock markets, slashing its benchmark interest rate by a hefty 0.75 percent in a bid to ward off recession in the United States and to reassure panic-stricken investors.

On Wednesday, in a clearly different message, European Central Bank head Jean-Claude Trichet said that in times of trouble it was critical that the ECB stick to its operating guidelines and ensure price stability.

That was taken on European markets, which had been rebounding in response to the Fed action the previous day, to mean that eurozone interest rates were not about to come down any time soon.

His comments quickly snuffed out a nascent European rally.

“Both institutions have financial market stability as part of their mission,” noted Charles Wyplosz, a professor at Geneva’s Graduate Institute of International Studies.

But while their principal mission is to combat inflation, their operating statutes reveal a fundamental difference.