Here we are on the last day of just the second month of 2015, and there have already been 21 central banks, covering 39 countries, that have loosened monetary policy. These various attempts to avoid domestic deflation has led to global easing at a time when our own Federal Reserve is hinting, although less so lately, at tightening in the quarters ahead. Diverging policies brings Atlas back to a question we asked earlier this year: can America support the rest of the world’s economy?
Not all rate cutting central banks represent large economies, but the pervasive wave points to concern about global output nonetheless. Uzbekistan started the trend on January 1st, but this is a nation with relatively small economic output, so its cut alone is not enough to raise eyebrows. However, 12 other banks (Romania, Switzerland, India, Egypt, Peru, Denmark, Turkey, Canada, European Central Bank, Pakistan, Singapore, Albania, and Russia) eased policies before January ended. The most recent cut came on Monday, February 23, 2015 from Israel, but before this cut, seven others (Australia, China, Denmark, Sweden, Indonesia, Azerbaijan, and Botswana) eased their monetary stance in February. You may have noticed Denmark was listed twice, but this country cut rates four times in less than three weeks!
Easier monetary policies tend to have a negative impact on the underlying currency. This may help explain some of the strength behind the American dollar, as our policy has remained untouched in an absolute sense but has become relatively stricter versus various trading partners. A stronger dollar here at home impacts import prices, making foreign-made goods less expensive than their domestic counterparts. In order to remain competitive, American producers will have to price their wares aggressively if they want to retain market share. Such a move will, in turn, tend to subdue any incipient inflationary pressures. This helps explain why Atlas does not believe the Federal Reserve will hike interest rates this year. America, as the world’s primary consumer, seems to have the economic weight of the world on its back. Any rate hike by us at this time would likely cause our dollar to strengthen even further, encouraging rather than preventing deflation here at home. (by C. Cox)