Fed getting little help from ECB, BOE on stimulus policy

Posted Sep 4th 2008 9:15AM by Joseph Lazzaro
Filed under: International Markets, Federal Reserve, Recession

These days, the U.S. Federal Reserve is not getting a great deal of help from its companion major central banks regarding monetary policy stimulus to pull the global economy out of is pronounced slowdown.

In the case of the Bank of England, it kept interest rates the same despite anemic GDP growth. In the case of the European Central Bank, it kept it's key rate at a seven-year high.

Economist: Two terrible decisions

Today, the BOE kept its benchmark interest rate at 5%, the ECB did the same at 4.25%, and London-based economist Mark Chandler is happy with neither.

"Just two terrible decisions stemming from flawed reasoning. Just dreadful," Chandler said. "The BOE and ECB are putting too much responsibility on the Fed to stimulate demand when we need all three central bank engines pulling at once to get out of this economic rut."

"In the case of the U.K., here we have no economic growth in Q2, and a housing market in a full retreat that's rivaling America's, sluggish consumer spending trends, and the Bank of England says inflation is the main concern? That's flawed reasoning, and a mistake," Chandler said. Chandler had expected the BOE to cut its main rate by 25 basis points to 4.75%.

Chandler added that he expects U.K. inflation, currently running at about a 4.0-4.4% annual rate, to moderate considerably in the second half of 2008 as oil prices continue to decline.

Regarding the ECB, Chandler was less-surprised by the continent's central bank's stand-pat status, but no less convinced that more monetary policy stimulus isn't needed. "The non-move was classic [ECB President Jean-Claude] Trichet, who says you start fighting a recession after you register roughly two quarters of negative growth," Chandler said. "It's an uber-hawkish stance that will lengthen and deepen Europe's recession."

Further, Chandler said one indicator of the seriousness of the economic slowdown in the U.K. and of continental Europe was the currency market's reaction to the two stand-pat decisions: neither caused a large rise in the euro or British pound versus the dollar. The euro traded at $1.4480, down slightly; the pound at $1.7803, up about four-tenths of a cent. "That suggests the euro and pound will continue to weaken, which means traders believe there's further economic slowing in the U.K. and Europe ahead," Chandler said. "I think the traders are correct."

Monetary Policy Analysis: Inflation is elevated in the U.K. and Europe, but the argument here agrees with economist Chandler: the balance of risks is tilted toward a recession. Hence, the stand-pat stance by the BOE and ECB only delays the monetary stimulus required to jump-start regional and global growth.

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