Three months is a long time in the world of economics. At the end of May, futures markets were prici...
Three months is a long time in the world of economics. At the end of May, futures markets were pricing in a three-quarter point increase in the US Federal Funds rate to 2.5% by year end. Since then, falling equity prices and weakening economic growth have caused interest rate expectations across the industrial world to fall precipitously.
Now the expectation is for a quarter point cut in rates by year end, with some commentators even predicting larger falls.
The US Federal Reserve was the first central bank to acknowledge that risks to the economy had shifted from those of strength to excessive weakness. At its last but one meeting in August, the Fed kept interest rates at a four-decade low of 1.75% but noted that weak stock markets and corporate scandals were taking their toll.
In the face of these potential hazards, policymakers changed the wording of the post-meeting statement to reflect the danger that the economy could deteriorate in the foreseeable future ' a signal they were prepared to cut rates in coming months should the outlook worsen.
A similar conclusion was reached at the most recent meeting with policy again being left on hold but the Fed still has two more opportunities to take action before the year end.
It was widely expected that other central banks would follow any lead provided by the Fed. Indeed, the Bank of England in a noticeable shift from last month's more neutral position, noted in the minutes of its September meeting that it would reduce rates to stimulate demand were it judged necessary to meet its inflation target.
Also, the change in sentiment of the previously hawkish European Central Bank (ECB) over recent weeks has been marked. The Bank said in its September bulletin that the eurozone's recovery was more fragile than forecast. It appears increasingly concerned that the fall in global stock markets is hampering the recovery of the economy. This is the first time the ECB has spelled out its concerns about recent trends in stock markets, suggesting a glacial shift in emphasis.
Over coming months, monetary authorities around the world will pay close attention to developments in the US economy, as well as casting a cautious eye on the consequences of rising oil prices and greater uncertainty caused by possible war with Iraq. Alan Greenspan will be hoping that the stuttering industrial recovery takes firmer ground and that greater stability in financial markets provides a basis for increased investment spending.
At the same time, consumer spending will need to hold up in the face of a weakening labour market and heavy debt burdens.
Ominously, there have been a spate of profit warnings in recent weeks and initial jobless claims have been rising, suggesting the Fed may have to act soon. The ECB will be hoping that an improving US economy will boost production in the eurozone over coming months.
However, if the economy continues to languish, it will likely follow any lead provided by the Fed despite inflation remaining above its target. With deficits in many European countries approaching Maastricht limits, stimulatory tax cuts or spending increases are not an option.
Change in tone from ECB.
Fed to cut rates if outlook worsens.
Further rate cuts expected.
'Right thing to do'
£69m spent on upgrades
European fintech market 'underserved'