The Problem With the Great Rate Divergence Narrative

After a period of relative uniformity among the biggest monetary authorities, it’s suddenly fashionable to talk of divergence in the path of interest rates. Unfortunately, this easy description papers over some important — and subtle — differences that have emerged over the past year. Such course corrections are healthy. The US and the Federal Reserve aren't the only show on earth.

When traders speak about separation in the direction of borrowing costs, what they tend to mean is that one of two central banks from the Group of Seven are doing something before the Fed. The notion has been given momentum by rate reductions from the Bank of Canada and the European Central Bank. They followed similar steps by Sweden and Switzerland. Protagonists play down the risks of moving before Washington: We do what our domestic conditions warrant, we don't have to march in lockstep. Yes, we are worried about dollar strength, but we are sovereign, and so on. In decades of covering central banks and markets, I have heard a lot of that talk. Sometimes, there is substance to it.