When the ECB began operation in 1999, many observers focused on its differences from the Federal Reserve. Yet, since the start, the ECB was much like the Fed. And, over the past two decades, the ECB and the Fed have learned a great deal from each other, furthering convergence.

Against this background, it is unsurprising that the broad monetary policy strategies in the United States and the euro area converged as well. On July 8, the ECB published the culmination of the strategy review that began in early 2020, the first since 2003. The implementation of the new strategy comes nearly one year after the Fed revised its longer-run goals in August 2020 (see our earlier posts here and here).

If past is prologue, observers will exaggerate the differences. Perhaps most obvious, unlike the Fed, the ECB’s strategic update did not introduce an averaging framework in which they would “make up” for past errors. Nevertheless, we suspect that it will be difficult to distinguish most Fed and ECB policy actions based on the modest differences in their strategic frameworks. For the most part, both revised strategies codify existing practice, as they permit extensive discretion in how they employ their growing set of policy tools.

In this post, we summarize the motivations for the ECB’s new strategy and describe three notable changes: target 2% inflation, symmetrically and unambiguously; integrate climate change into the framework; and outline a plan to introduce owner-occupied housing into the price index they target (the euro area harmonised index of consumer prices). While the new strategy can help the ECB achieve its price stability mandate, in our view the overall impact of the revisions is likely to be modest….