Fed's solo act gets tougher with ECB, others in stimulus mode

Thu Jan 22, 2015 5:55pm EST
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By Howard Schneider and Michael Flaherty

WASHINGTON (Reuters) - Federal Reserve policymakers, already struggling to assure investors that they remain on track for a mid-year interest rate rise, will find the task has just become harder with their peers in Europe and elsewhere headed in the opposite direction.

The swelling ranks of central banks cutting rates and ramping up stimulus make it more difficult and riskier for the Fed to proceed with plans to end crisis-era policies, according to Fed analysts and former staffers.

It is not unusual for central banks to be out of synch at times, but the deepening divide between the Fed and much of the rest of the world is unprecedented, heightening the risks and uncertainty surrounding the Fed's plans, economists say.

The European Central Bank's decision on Thursday to pump 60 billion euros ($68.17 billion) a month into the faltering euro zone economy just deepened the divide. The stimulus rivals the size of the quantitative easing program the Fed ended only three months ago in a sign of confidence about U.S. economic recovery.

The euro fell below $1.14 after the ECB announcement, its lowest level since July 2003, while interest rates on long term U.S. bonds continued their recent nosedive.

“The foreign outlook...has darkened. And that will make this decision - lift off, the path of interest rates thereafter, how you communicate it – harder,” said Jon Faust, director of the Center for Financial Economics at Johns Hopkins University in Baltimore and a former adviser to Fed chair Janet Yellen.

“It will be doubly important for the (Fed’s policy setting committee) to communicate how it is thinking about risks flowing from abroad, because we are facing a truly unique constellation of circumstances.”

The Federal Open Market Committee meets next week, and is expected to repeat that those risks from abroad have yet to throw the U.S. recovery or their rate plans off track. U.S. central bankers have been adamant on that point over the past several months despite tumbling oil prices, ebbing global growth, and market expectations that the Fed will eventually capitulate and delay its first rate increase since 2006.   Continued...

A detail from the front of the United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron