Oil spike may split Fed and ECB

The Federal Reserve and European Central Bank may go their separate ways if Middle East unrest provokes a sustained, inflationary oil price spike.

Crude prices creeping back into the triple digits have sparked concern about slower economic growth and will no doubt reignite two long-running monetary policy debates:

Should central banks have a single inflation-fighting mandate, as the ECB does, or dual goals of price stability and full employment, like the Fed?

Should policymakers focus on headline inflation rates or strip out volatile food and energy prices?

Fed Chairman Ben Bernanke can expect questions on both topics when he delivers his twice-yearly testimony to Congress on Tuesday and Wednesday.

A day later, the ECB holds its policy-setting meeting and will have to judge whether oil prices pose an immediate threat when year-over-year inflation is already above its target. Economists widely expect the ECB to hold rates steady, but they will be hanging on President Jean-Claude Trichet’s every word for clues on whether he is leaning toward a hike soon.

Nigel Gault, chief U.S. economist with IHS Global Insight in Lexington, Massachusetts, said persistently high oil prices would curb consumer spending and drive up the still-lofty jobless rate — which would make the Fed less inclined to raise interest rates.

“The inflation-phobic European Central Bank might react differently, which may explain why the euro has been rising in recent days,” Gault said.

Indeed, back in mid-2008, when oil prices briefly approached $150 a barrel, the ECB raised rates while the Fed held steady.