Bucking the trend.

Photographer: Mark Wilson

Fed Shouldn't Fly Solo on Rates

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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So far this year, at least 19 countries have cut their official central bank interest rates. The Federal Reserve, however, seems on track to raise its benchmark rate later this year. Is the U.S. economy really robust enough to require tighter monetary policy when the rest of the world is clearly still worried about the outlook for global growth?

The Fed Eases Off

The rate-cutting race began on the first day of the year, with Uzbekistan. Here's a chart illustrating just how prevalent the fashion for cheaper borrowing costs is:

Many of these reductions weren't anticipated by economists, or were sprung on investors by central banks changing policy at unscheduled meetings. But the cuts have come so thick and fast that the word "surprise" is no longer appropriate.

By contrast, the Fed is expected to double its key rate to 0.5 percent by the end of September, with a further increase to 0.75 percent by the end of the year, according to the median forecast of 72 economists surveyed by Bloomberg News. Morgan Stanley predicts that the Bank of England, the only other major central bank that's even close to pushing up borrowing costs, is at least three months behind the Fed; the European Central Bank, meantime, is more than two years away from tighter policy, according to the U.S. investment bank:

Source: Morgan Stanley via Bloomberg

Being out of step with your central banking peers isn't like having the wrong haircut as a teenager, or listening to a different genre of music from your friends. It matters because the world is engaged in a quiet currency war, and the dollar is ascending because investors prefer to own currencies bearing higher rather than lower interest rates. The dollar has climbed 17 percent in the past year against the currencies of the countries the U.S. does most trade with; U.S. companies including Microsoft, Procter & Gamble and Apple are whining that their exports and overseas earnings are suffering as a result. Dollar strength already reflects expectations for higher rates, but if those expectations are fulfilled, the greenback is likely to rise even higher.

As big as the U.S. economy is, it doesn’t operate in splendid isolation from the rest of the world. Tightening policy while central banks elsewhere are ringing alarm bells about their domestic growth prospects would be a risky move by the Fed, at a time when the world's other major economies -- markets that U.S. exporters depend on -- are expected to slow. China, which trimmed its key rate by a quarter-point to 5.35 percent on Saturday, today set its forecast for growth at about 7 percent, the lowest in more than 15 years.

The Fed isn't united in seeing a need for higher rates. Chicago Federal Reserve Bank President Charles Evans said on Wednesday that he'd prefer to delay any rate increases until next year: "Even with this delay in raising short-term rates, my forecast is that we will not actually achieve 2 percent inflation until 2018."

The Bank of England's nine-member policy panel left rates on hold at its meeting today; as recently as December, two of its member voted for higher rates, with Martin Weale and Ian McCafferty falling back into line with their colleagues in January after five months of dissent. Unless the Fed knows something about the global economy that its peers around the world are missing, the U.S. central bank should be cautious about rushing to tighten policy -- and willing to change course away from higher rates if the outlook continues to deteriorate.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net