World Feds policy may converge

Among the world's major central banks, the Federal Reserve looks as out-of-place as a person showing up to a black-tie affair in a Halloween costume. Since September, the Fed has slashed its federal-funds-rate target by 2½ percentage points to 3%, as aggressive as its cuts going into the 2001 recession. Other central bankers have been loath to follow the Fed's lead. The Bank of England has cut its target rate just twice since December, by just a half percentage point in total. The European Central Bank and the Bank of Japan haven't touched rates since credit problems emerged last year. The Reserve Bank of Australia has been raising rates, with the most recent increase coming yesterday. Canada's central bank cut its official interest rate by a half percentage point yesterday, to 3.5%, and indicated further rate cuts could be necessary to deal with the fallout from a deteriorating U.S. economy. Canada's major banks were expected to lower their prime rates in response to the Bank of Canada's action, but it wasn't clear when they would act. Canadian banks typically follow the central bank's rate cuts within an hour or so, but they didn't move yesterday. ECB and Bank of England policy makers meet this week and are expected to keep rates unchanged. Despite signs of economic weakness, inflation in Europe and the United Kingdom has been high, making them reluctant to pursue stimulative rate cuts. Why the disconnect? The Fed might be on the wrong course. Many complain its easy-money policy is fueling global commodity inflation, making it harder for other central banks to do their jobs. Another possibility is that other nations are insulated from America's woes and are correctly staying out of the U.S. turmoil. If the global economy was really slowing, this argument goes, commodity prices would be falling, not soaring. A third possibility, and probably the most likely, is that the rest of the world will eventually have to catch up to the Fed. The Australian central bank, even as it raised interest rates, noted tighter credit conditions and softer business and consumer sentiment in commodity-rich Australia and warned that "global growth will be below trend in 2008." Canada's central bank has also gotten into the rate-cutting act, saying the U.S. slump would have "significant spillover effects on the global economy." Central bank easing policies will eventually converge, says Lena Komileva, Group-of-Seven economist at Tullett Prebon. The slow response of others means their economies might keep slowing even after a U.S. recovery sets in.