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Lower Interest Rates Could Come Faster Than We Realize

Lower Interest Rates Could Come Faster Than We Realize

(Bloomberg Opinion) -- In a measure of how the global slowdown has caught officials on the hop, an interest-rate cut by the Federal Reserve no longer sounds outlandish.

As dramatic as the Fed's pivot has been, it may not be dramatic enough. Just a few weeks ago, the idea that the world's most powerful central bank should be loosening was a fringe view. Now, respected policy makers are entertaining the prospect, albeit without quite endorsing it. Substantial deceleration in Asia, principally China, and Europe are driving the re-evaluation.

The Fed’s counterparts around the world could use the nudge. Pretty much the entire monetary college has been way too conservative. The flow of news and market sentiment is now forcing their hands.

That's one way to see the shift at the Reserve Bank of New Zealand. The RBNZ said Wednesday the danger of “a more pronounced global downturn has increased” and, consequently, the next move in borrowing costs is likely down. Quite the switch. Last month, RBNZ officials pooh-poohed the idea of a cut.

I'm loath to equate one of the smallest economies with some of the biggest, but the distance Kiwi officials have traveled is indicative of the broader picture.

Comments in Hong Kong this week by Chicago Fed President Charles Evans are revealing. In a speech on risk management, Evans revisited the Asian financial crisis, recalling that in December 1997 the Fed's stance was wait-and-see. “Sound familiar?” he asked. Evans went on to note that by fall 1998, the Fed had cut and kept going. There was a total 0.75 percentage points of reductions through November of that year.

While reminding us that the Fed has a history of responding to global weakness when it risks upsetting domestic prospects, Evans's 1990s reference is also a bit alarming. Deep recessions were the lay of the land in Asia by mid-1998; the currency crisis began a year earlier. The Fed's response was late and only happened after dislocations spread to Russia and jeopardized the stability of American finance. 

Nevertheless, give Evans credit for attentiveness to global dynamics. (Fed governor Lael Brainard has been an effective advocate in more recent years for the idea that what happens beyond America's shores affects America.) Skeptics will say “Oh, but Evans is a dove, so of course he would say this!” But his is mostly a situational dovishness. Evans isn’t doctrinaire.

Eric Rosengren of the Boston Fed also countenanced the idea of a cut, linked to the global downdraft, in a March 22 interview with my Bloomberg News colleague Christopher Condon published this week. It's not his base case, but he's “also quite willing to accept that if the economy weakens and the global economy weakens more than I’m anticipating – and the recent data could be consistent with that – then the next move could be down.”

As China's slowdown ripples through the region, Asia's central bankers have been remarkably cautious. China itself has taken multiple steps to spur activity and India reduced rates in February. Aside from that, though, there's been little beyond reassuring language that suggests hikes are probably done, or close to being done. Glasses half empty, not half full, and so on. They’ll be watching the Fed, of course, and economists expect to see cuts in Southeast Asia, South Korea and Australia – but not for a few months yet.

Slowly, central banks are being dragged by the global downdraft toward easing. But there's a disappointing absence of urgency.

Turning points  in the cycle are tough for central banks. They don't want to jump too early and freak people out. They have the responsibilities of office. They have to make sure that changes in the outlook are genuine and that markets are sending a signal rather than just emitting noise.

Fair enough. But it does mean that when they do adjust, they often look like they are behind the times. Central bankers need to find a way to get in front of the story.

To contact the editor responsible for this story: David Fickling at dfickling@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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