European Central Bank Eases Fed's Burden
Thursday May 10, 3:33 pm Eastern Time
By Daniel Sternoff
<<NEW YORK (Reuters) - The European Central Bank's shock interest rate cut on Thursday should lighten the U.S. Federal Reserve's load in battling a global economic downturn, but is unlikely to alter the downward arc of U.S. rates, analysts said.
In an abrupt shift, the ECB reduced its key lending rate to 4.50 percent from 4.75 percent, becoming the world's last major monetary power to cut rates this year and scrapping weeks of insistence that inflation risks forestalled an easier policy.
The ECB said evidence that euro zone money supply growth was much weaker than earlier thought had assuaged some of its concerns over inflation.
But analysts said the ECB was using inflation as a fig leaf for the belated recognition that torpid U.S. and Japanese growth was hurting a hitherto resilient Europe, and that the world faced some risk of synchronized weakness or recession.
European central bankers had bristled in recent weeks at calls from officials in the United States, the International Monetary Fund and other industrialized nations that the ECB shoulder some of the burden of averting a global slump.
``This is a very significant shift. Now the ECB is on board ship with other central banks who are combating not only their own domestic difficulties, but also the weakening world economy,'' said Allen Sinai, chief economist at Decision Economics.
The Fed has slashed U.S. rates by two full percentage points this year, saying overseas weakness could exacerbate an industrial slump amid weak business spending and consumer confidence.
The Bank of England also cut its benchmark interest rate by a quarter point to 5.25 percent on Thursday, its third cut of the year. Japan, Canada, Switzerland, Australia, New Zealand, Denmark and Korea have all lowered borrowing costs in 2001.
``The global cyclical outlook has not been this bleak for over 20 years. The ECB is waking up,'' said Anirvan Banerji, director of research at the Economic Cycle Research Institute in New York, which tracks business cycles around the world.
Both Banerji and Sinai have warned that a simultaneous slump in major industrial centers could leave the world without a central locomotive to power a global recovery.
``Without the ECB moving, it was making the Fed's job harder,'' Banerji said. ``The Fed knew we risked facing an international recession. They knew there was a risk of recession in Germany and Europe even though the ECB didn't.''
US BOND MARKET SEES PRESSURE OFF FED; ANALYSTS DIFFER
U.S. Treasuries tumbled on Thursday as bond market traders bet the ECB's move would take some pressure off the Fed to continue to slash U.S. rates aggressively.
But analysts said the ECB's modest rate cut, while a relief for the U.S. central bank, would have little impact on the Fed's easing cycle.
``This helps on the margin if it will keep European growth from dropping off. Europe is an important trading partner, but I think the Fed is more concerned about what is happening domestically in the investment and consumer sector,'' said Peter Hooper, chief economist at Deutsche Banc Alex. Brown.
He said the fact that U.S. imports have been declining at a more rapid pace than exports demonstrated that weak domestic demand was a greater problem than sluggish overseas growth.
Jim Glassman, senior economist at J.P. Morgan Chase in New York, said the Fed was most likely nearly finished with its four-month-old rate-cutting cycle and that the ECB's new stance was unlikely to sway the U.S. central bank's trajectory.
``Within its next two meetings, the Fed is going to have the federal funds rate where it wants,'' he said.
All but one of Wall Street's 25 primary dealers of U.S. government securities expect the Fed will cut its 4.50 percent federal funds overnight lending rate by another 0.50 percentage point on May 15, and 19 dealers expect an additional rate cut at the Fed's June 26-27 meeting.
``This is all going to be done within the next six weeks so there is nothing the ECB can do to change that. But it does bode well for global growth recovery prospects, so in a subtle way it does take pressure off down the road,'' Glassman said.>> |
