The global central bank is alive and well

By Daniel Moss

After years of common purpose and shared commitment, central bankers are characterised as going their own way. The emphasis on divergence in the path of interest rates, a line often encouraged by officials themselves, is unfortunate and cloaks an underlying theme. The coming year will be defined by easing, almost everywhere.

The only thing up for grabs is the depth of rate cuts — and how they are framed.

Like most narratives, the purported disparity revolves around the Federal Reserve. Usually, the Fed sets the pace for global monetary cycles. While Chair Jerome Powell is widely expected to trim borrowing costs next month, and flesh out his thinking in an address at Jackson Hole on Friday, a few authorities have already responded to receding inflation. The European Central Bank, the Bank of England and the Reserve Bank of New Zealand acted recently; China has been sporadically easing — in tiny increments — for a while.

But these reductions have been modest and accompanied by tough language that emphasises the danger of inflation. Expect the commentary to be more balanced and less price-focused once the Fed joins in. Monetary chiefs are always asked about the Fed, and they routinely stress they are their own people with their own mandates in their own nations. What's often unsaid is that they tend not to stray very far from the Mother Ship and that the global themes they’re addressing are similar. Just because cuts aren't happening the same day doesn't mean there is a gap of consequence. What's a month or two, given adjustments in rates are often said to affect businesses and consumers with long lags?

Part of the problem may be that the last major easing cycles have been spurred by emergencies, which prompted rapid responses across markets: the 2007-2009 subprime meltdown and the onset of the pandemic. The latter stimulus was unwound from late 2021, first slowly and then aggressively. Could we have forgotten what normal is?

Domestic factors do matter, but the trends that shape decisions don't always respect borders. How things look at home will explain a bit more than half the anticipated cuts, JPMorgan Chase & Co. economists said in a note last month. They reckon global rates surged by 360 basis points from early 2022 to mid-2023, and will come down by 130 basis points through the end of next year. “If our forecast is right, the coming year will deliver the most synchronised set of rate cuts ever seen outside of recession,” they wrote. The firm also drew an important distinction between synchronized moves and coordinated ones.

The divergence camp seems to crave a granular level of policy management that seldom occurs outside a crisis. Fans of coordination must look back nostalgically at the early morning of Oct. 8, 2008. Six major central banks, led by the Fed and the ECB, slashed their main rates in a rare — at that point, unprecedented — joint action. The People's Bank of China didn't join them, but lowered its own rate a few minutes later. Sovereignty is relative when collective backs are to the wall. Such actions stick in the memory of the cognoscenti; mercifully, they aren't often required.

It's a stretch to say that country X or bank Y has been “late” to either raising or cutting rates. Yes, compared with South Korea or New Zealand, the Fed was tardy in hiking, beginning in March 2022. But would Fed scolds want the double-dip recession that has rocked New Zealand and is about to be a triple crown? The Reserve Bank of Australia has been chastised for being late to hiking rates, but it was just two months behind the Fed and in front of the ECB. It's the trend that's the true friend.

And while we will have to wait for September for the Federal Open Market Committee’s formal judgment, the signals have been clear enough. A year from now, with luck, fine points of sequencing will matter less than getting the broad thrust right. Cuts are coming. The outliers will be those that abstain. Fear not, the global central bank is alive and well.