Fed swimming against global tide of easier rates

Wed Jun 1, 2016 9:19am EDT
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By Jamie McGeever

LONDON (Reuters) - Rarely has the world's most important and powerful central bank been so isolated.

As the Federal Reserve prepares the ground for another interest rate hike, most other central banks are moving in the opposite direction. And the divergence is widening.

No fewer than 53 central banks have eased monetary policy since the start of last year, almost all by lowering rates. Indeed, the pace of policy easing nearly everywhere is accelerating even as the Fed nears its second hike of the cycle.

This raises several questions. If the global recovery is firmly rooted, why are so many central banks cutting rates? Can the global economy handle rising U.S. rates, and perhaps a stronger dollar that follows? Will the Fed be forced - again - to slow the pace of tightening or even abandon it altogether?

"I can't ever remember a situation when we've seen anything like this before," said Torsten Slok, chief international economist at Deutsche Bank in New York and a former International Monetary Fund economist.

"When I was at the IMF there was only one global business cycle. In the late 1990s and early 2000s it would have been impossible to imagine the kind of decoupling we have today," he said.

The divergence can drive business costs and trade flows, lead to outsized exchange rate moves and highlight vulnerabilities in the global financial system, casting doubt on whether the world can cope with relatively higher U.S. borrowing costs and dollar.

Deflationary forces from the oil price plunge to $50 from $115 in the second half of 2014 kick-started central banks into action at the beginning of last year. Fourteen eased policy in January 2015, 11 in February and 12 in March. Denmark's central bank cut rates four times in as many weeks.   Continued...

Federal Reserve Chair Janet Yellen speaks at the Radcliffe Institute for Advanced Studies at Harvard University in Cambridge, Massachusetts, U.S. May 27, 2016.  REUTERS/Brian Snyder