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."

The protracted housing slump that has devastated U.S. home prices now appears to have fully-enveloped the United Kingdom. Home prices in the United Kingdom in August fell at their fastest pace in two decades (pdf), U.K.-based mortgage lender Nationwide Building Society announced Thursday.

On a year-over-year basis, the average price of a U.K. home plummeted 10.5% to $301,500 or 164,654 British pounds in August, NBS said. Further, it was the first year-over-year double-digit decline in the U.K. since 1990.

London-based economist Mark Chandler told BloggingStocks Thursday the August U.K. housing data, "is just dreadful."

"Housing in the U.K. is becoming a bit of a 'magical mystery tour,' to borrow a phrase from The Beatles. For a month or so, we thought the declines in home prices had moderated. Apparently not," Chandler said. "Tighter lending requirements and real concern about the economy have sapped sales and it's really showing up in the price data."

There are lines of reasoning, and then there are lines of reasoning.

European Central Bank board member Axel Weber said Wednesday there's no plan for interest rate cuts and policy makers may, in fact, have to raise rates as the economy accelerates out its slump, Bloomberg News reported. He added that "monetary policy is where it should be" and that "discussion about declining rates in Europe is premature."

Weber's comments occur after Eurostat reported that Europe's economy contracted 0.2% in the second quarter (pdf), amid signs of slowing in business investment and consumer spending, and sagging business confidence.

London-based economist Mark Chandler told BloggingStocks Wednesday that data he's reviewed indicate Europe's economy will continue to slow in Q3, which is why he's somewhat taken aback by Weber's comments.

"Weber's comments are a bit troubling. I mean, what data is he looking at? The comments will create a bit of a row [dispute] in the U.K. because our economy is not going to contribute to the recovery he sees, not at this stage," Chandler said.

With the world's top central bankers gathering in Jackson Hole, Wyoming for their annual retreat, amid the global economy's worst credit crunch in a generation and slowing GDP growth in every region, BloggingStocks asked a few economists what, in their opinion, should be on the central bankers' minds.

Economist David H. Wang – "I bet they sneak away for a few minutes to watch the United States versus Argentina [2008 Olympics] semi-final basketball game today. I would. Seriously, on the one hand central bankers face the prospect of another round of housing-related write-offs and the need to intervene to keep markets liquid. On the other hand, we still have oil-fed inflation in the system, so my sense is they will issue a statement indicating that the major central banks 'stand at the ready to provide additional liquidity and take other measures' to keep markets functioning."

Economist Peter Dawson – "I would really like to see some European Central Bank comments from [President Jean-Claude] Trichet that he's ready to cut rates and that the greater risk in Europe, like the U.S., is toward recession. Demand in Europe is slowing, and if E.U.-U.S. trade flows continue to decline, that will prolong the recession. Hence, ECB monetary policy is intrinsic to the recovery story."

Economist Glen Langan – "Probably the most important item on their agenda, after maintaining liquid, functioning markets, concerns long-term interest rates. They haven't fallen, due to banks' reluctance to lend, in order to repair their balance sheets. Housing faces a 2-3 year recovery period but we'll need long-term mortgage rates for 30-year fixed loans to drift back toward 6.00% or 5.75% to speed housing's transition back to health. If monetary officials don't find a way to get long-term rates to trend lower, that delays the recovery."

The dollar Friday was on course to record its fifth consecutive weekly gain, propelled higher by the prospect that economies in Europe may be later in the recession/expansion economic cycle than the United States.

The above suggests the Bank of England and the European Central Bank will have to cut interest rates -- itself a bullish factor for the dollar -- with the U.S. economy recovering sooner than the economies in the United Kingdom and euro-zone -- another dollar-bullish circumstance.

On Friday, the dollar strengthened 1.5 cents to $1.4675 versus the euro, and about seven-tenths of a cent to $1.8632 versus the British pound. The dollar also rose about 1 yen to 110.61 versus Japan's yen and about one-half cent to $1.0988 versus the Swiss franc.

From dollar-bear to dollar-skeptic

Currency Trader Andrew Resnick said he's not a dollar bull yet, but the changing global economic landscape has moved him from the dollar-bear category to "the dollar-skeptic category."

"Clearly, fundamentals are shifting in favor of the dollar. Global growth is slowing, taking pressure off commodity prices. Export gains are lowering the U.S. trade deficit, and there's now a better than 60% chance Europe [including the U.K.] will have to cut interest rates," Resnick said. "Those are the best fundamentals for the dollar in about three years." Resnick added that he's presently flat, or had no open currency trading positions.

The great Bob Dylan once wrote "so you better start swimmin', or you'll sink like a stone, because the times they are-a changin'."

The dollar bears better start swimming, or at least change their positions, because the dollar's improbable rise continues.

The British pound fell to a two year low versus the dollar Wednesday, plunging 3 cents -- a gargantuan move in the currency market for one day -- to $1.8651, after the Bank of England lowered its GDP growth forecast for the United Kingdom, Bloomberg News reported Wednesday. The pound, which traded at $2.0157 last month, has now fallen about 7.5% versus the dollar in two weeks.

The pound also fell about five yen to 202.68 versus Japan's yen Wednesday morning.

Bank of England Governor Mervyn King said 2009 will be "painful" with zero growth and high inflation, The Telegraph reported Wednesday.

Further, although the Bank of England underscored the need for monetary policy vigilance to control inflation, currency traders interpreted the bank's GDP comments as a sign that an interest rate cut is likely from England's central bank, currency trader Andrew Resnick said.

Interest rates remain on hold across the pond.

The European Central Bank and the Bank of England kept benchmark, short-term interest rates the same Thursday, as the major central banks chose to take a wait-and-see stance amid the competing challenges of rising inflation and slowing growth.

The ECB kept its key rate, the refinance rate, at 4.25%; the BOE, its rate on commercial bank reserves, at 5%.

The euro and British pound were little changed versus the dollar after the decision. The euro strengthened about three-tenths of a cent to $1.541 and the British pound strengthened one-quarter cent to $1.9516 in Thursday afternoon trading in Europe.

Rates: tougher call for BOE

London-based economist Mark Chandler told BloggingStocks Thursday the Bank of England's circumstance is "a tougher call for monetary policy markers" than the ECB's.

"In the U.K., inflation is rising and the growth outlook is not good, whereas [continental] Europe has a better GDP outlook. So in that sense the Bank of England has a difficult task, similar to the U.S. Federal Reserve's. They have to find a way to bring down inflation from about 4% to 2% without causing a deeper contraction," Chandler said. "Given slowing growth right now, the best stance was to do nothing." The BOE has cut interest rates three times since December 2007.

The Bank of England Thursday kept its key, short-term interest rate the same, at 5%, the bank announced. Economists surveyed by Bloomberg News had expected the BOE to maintain current interest rate levels.

In its previous meeting, the BOE kept its benchmark interest the same, as well. The BOE's last rate cut occurred on 10 April 2008, when it lowered its key rate by 25 basis points to 5.0%.

In contrast, the U.S. Federal Reserve has lowered its key, short-term interest rate by 325 basis points, to 2% from 5.25%, as it attempts to jump-start a U.S. economy dragged down by its worst housing slump in a generation. At its most recent meeting, the Fed took a pause in its rate cut cycle, with Fed Chairman Ben Bernanke recently signaling his concern about rising inflation and the decline in the U.S. dollar.

Meanwhile, the European Central Bank has shifted from an accommodative to a restrictive monetary policy: last week the ECB increased its key rate, the refinance rate, by a quarter point, to 4.25%.

BOE's decision: no surprise

London-based economist Mark Chandler told BloggingStocks Thursday he wasn't surprised by the BOE's stand-pat decision. "There is concern about rising inflation here in the U.K., but the signs of economic slowdown are all around us, also, not the least of which being declining housing prices," Chandler said. "Housing prices in June dropped the most in that month in about 15 years. The U.K. also isn't affected as much by high oil prices as the U.S. and [continental] Europe are, so that gives the Bank of England some leeway. And if GDP continues to slow, the bias will be toward lowering rates, not raising them."

The dollar rose to its highest level in more than a week Monday morning on talk leaders at the G-8 summit in Japan will support the currency in an attempt to halt rising commodity prices.

The dollar strengthened about one-half cent versus the euro to $1.5629 and about 1 cent versus the British pound to $1.9659 in Monday morning trading. The dollar also rose about one-half yen to 107.66 versus Japan's yen.

Ian Stannard, a senior currency strategist at BNP Paribas SA (NASDAQ: BNPQY), France's largest bank, told Bloomberg News Monday that support for the dollar in the form of verbal invention continues, driven by the thesis that a stronger dollar, globally, is in everyone's interest.

Many economists agree that a falling and weak dollar has been a factor in rising commodity prices. Oil and other commodities tend to rise when the dollar falls as investors / traders seek to preserve purchasing power of the decreased value of dollar-denominated commodities by bidding their price up. However, economists differ regarding the extent of the weak dollar's commodity-inflation impact, with some arguing it is only a mild factor.

'Actions speak louder than words'

Further, economist Peter Dawson told BloggingStocks Monday, dollar bulls should not feel too emboldened by a verbal stance by the G-8.

To paraphrase Mark Twain, if you don't like the monetary policy climate in the world's major economies, wait awhile.
Monetary policy, historically the super oil tankers of the international finance world -- slow to get in motion, with only gradual course adjustments -- have in recent times approximated quicker responses typically found elsewhere in the markets.

Up until about a week ago, the mantra was lower interest rates, liquidity to guard against the credit squeeze/crisis, with a bias toward stimulating economic growth. For example, economists and analysts generally expected the European Central Bank to (finally) lower its benchmark, short-term interest rate to stimulate the euro-zone's slowing economy.

But then last week the notoriously hawkish ECB President Jean-Claude Trichet became notoriously overt: he said the ECB would likely increase interest rates at its next meeting to check the continent's inflation rate, which like the U.S.'s, is rising due to sky-high oil prices.

Then on Monday, U.S. Federal Reserve Chairman Ben Bernanke said he'll "strongly resist" any increase in inflation expectations, Bloomberg News reported. The markets interpreted Bernanke's comments as a sign the Fed will seek to both quell inflation and limit a further decline in the dollar -- the latter itself a source of rising commodity costs and inflation. Bernanke's comments caused the dollar to strengthen Monday against the world's other major currencies -- a strengthening that continued through Tuesday afternoon. (Still, traders are reluctant to declare it a dollar rally, given the dollar's many, prior, false break-outs.)

The European Central Bank and the Bank of England Thursday each kept their key, short-term interest rates the same, at 4% and 5%, respectively, the banks announced.

Economists surveyed by Bloomberg News had expected both the ECB and BOE to maintain current interest rate levels.

Also, in their previous meetings, both the ECB and BOE kept their benchmark interest the same at 4% and 5%, respectively. The BOE's last rate cut occurred on 10 April 2008, when it lowered its key rate by 25 basis points to 5%.

In contrast, since September 2007 the U.S. Federal Reserve has lowered its key, short-term interest rate 5 times, or by 325 basis points, to 2% from 5.25%, attempting to jump-start a U.S. economy dragged down by its worst housing slump in a generation. Given the extensive monetary stimulus buy the Fed, many economists now expect it to at least take a pause in its rate cut cycle, with Fed Chairman Ben Bernanke recently signaling his concern about rising inflation and the decline in the U.S. dollar.

Inflation in Europe's euro-zone accelerated in May 2008, as the rising price of oil took its toll on prices at the consumer level.

Inflation increased to a 3.6% annual rate in May 2008, up from a 3.3% annualized rate in April 2008, EuroStat, the European Union's economics statistics office, announced Friday (pdf). It was the highest year-over-year inflation increase in 16 years.

Economists surveyed by Bloomberg News had expected euro-zone inflation to register a 3.5% annual pace in May 2008.

The European Central Bank's official inflation target is below 2%. The ECB has failed to keep inflation below this level for 10 consecutive years.

Further, although inflation had trended up above 3% in recent months, economists had argued that inflation still was not high enough on the continent to rule-out a reduction in short-term interest rates.

To jump-start the U.S. and regional economies, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% since September 2007, while the Bank of England has cut its key rate three times to 5%. Meanwhile, the ECB has kept its key rate the same, at 4%, with ECB President Jean-Claude Trichet repeatedly underscoring the risk to the euro-zone economy from high-oil-cost-driven rising inflation.

Hence, May 2008's accelerating inflation may very well convince the ECB to not only maintain interest rates at current levels, but raise rates as 2008 progresses.

Economic Analysis: Another negative data point for both regional and global growth, as rising euro-zone inflation gives more fodder to the ECB hawks to maintain short-term interest rates at current levels. Further, given ECB President Trichet's inflation control penchant, the odds of a rate cut stand at about 10-20%: an ECB rate freeze is not what the west needs to stimulate demand, but the ECB is not likely to budge, unless euro-zone GDP growth slows considerably in Q3 2008.

Could ECB President Jean-Claude Trichet be compelled to modify his legendary hawkish stance regarding inflation?

He might, if sentiment against the ECB inflation target continues to mount. Bloomberg News Tuesday quoted London-based Morgan Stanley co-chief economist Joachim Fels as concluding that the ECB's goal of lowering inflation below 2% as unachievable and not credible. "The ECB's keeping up a fiction," Fels said, adding that the ECB should adjust the target.

As part of an effort to jump-start a U.S. economy slowed to a crawl by the nation's worst housing recession in more than 15 years, and to prevent a global economic slowdown, the U.S. Federal Reserve has cut short-term interest rates by 325 basis points to 2% in the past year. Further, to stave off a potential regional and global slowdown, the Bank of England has cut its key rate three times to 5%.

The dollar bulls have been vanquished again.

For the fourth time since the Economic Stimulus Act of 2008 was passed in February 2008, a nascent dollar rally has failed.

In Friday afternoon trading, the dollar was poised to record a 3-cent decline versus the euro for the week, to about $1.5776. The dollar has also fallen about 3 cents versus the British pound to $1.9788, and about 1.2 yen to 103.28 versus Japan's yen.

The kindling for a rally certainly existed earlier in the week: the prospect of 'the beginning of the end' of the worst of the U.S. housing market's troubles, and an interest rate decrease by both the Bank of England and the European Central Bank had emboldened dollar bulls.

Are the world's major central banks signaling an end to interest rate cut cycle?

Officials from three of the four major central banks - - all except the Bank of Japan - - have recently signaled their concern about rising inflation stemming from rate cuts implemented to stimulate demand following the credit crisis, Bloomberg News reported Friday. The U.S. Federal Reserve, Bank of England, and European Central Bank have commented, in various phraseologies, their concerns about prices and business costs.

Economist David H. Wang told BloggingStocks investors/traders can ignore comments out of the ECB, but not the Fed's or the BOE's - - which translates to at least a rate cut pause.

"[ECB President Jean-Claude] Trichet has been on the wires commenting on the need to contain prices, but he's been doing that since, I think, 1962, so ignore that," Wang said. "But the Fed comment blitz we had earlier this week and the Bank of England comments about rising prices I think are clear signals of a rate cut pause. The central banks have implemented enough monetary stimulus, for now."