Maybe it's the disheartening early morning chill that suggests winter is coming to the northern tundra of Minnesota where I live, but there seems to be a darkening tinge to the economy's outlook. The odds of something going wrong suddenly seem greater than they were as recently as a month ago. The worrisome signs include a faltering stock market, slowing corporate profit growth, a swooning euro, and higher energy prices.

Taken altogether, now is the right time for the European Central Bank and the Federal Reserve Board to ease their monetary policies. The European Central Bank has raised rates two percentage points, largely in a failed campaign to shore up euroland's weak currency. The Fed has hiked rates one-and-three-quarters percentage points in a more successful effort to moderate the U.S. economy's growth rate. But the combined impact of their monetary tightening now jeopardizes Europe and America's economic expansions.

The biggest reason for reversing course is the recent run-up in oil prices. Higher oil prices plus higher interest rates are an equation for slower economic growth. But higher oil prices do not add up to more inflation, despite the experience of the 1970s. Paying more for fuel may be a force for lower overall prices or deflation in an intensely competitive global economy.

The European Central Bank and the Fed should ease their monetary policies. And they should act quickly, before the brisk of autumn turns into the frost of winter.

 


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