By Anne D. Picker, International Economist,Econoday
Monday, April 23, 2001

The Federal Reserve astounded markets worldwide when they lowered the policy making federal funds interest rate 50 basis points to 4.5 percent. This puts U.S. interest rates 25 basis points below those of the European Central Bank, and adds to the pressures on the ECB to lower EMU rates on Thursday. Equities, which had been inching forward, soared as investors exalted on the news. Investors are taking bad news with more equanimity and not going into severe depression after each disappointing earnings report. On the week, all indexes followed here were up substantially, except the Mexican Bolsa.

Preceding the Fed move, the Bank of Canada lowered its policy making rate by 25 basis points to 5 percent. The Bank said that the Canadian economy is growing below its potential and cited the marked slowdown in the U.S. economy as the primary reason for the rate reduction. The Bank had previously lowered rates in January and March. Although Canada is growing at a faster rate than the United States, their economy sends about 90 percent of their exports south of the border, making the economy exceedingly vulnerable to the U.S. slowdown.

The Bank of Japan confirmed what the government of Japan had already said and downgraded its assessment of the staggering economy. The Bank of Japan said that industrial production was declining rapidly and business sentiment worsening. The Bank's monthly economic report follows a governmental review, which admitted for the first time in more than five years that the economy is weakening. Japan's industrial decline is attributed to declining exports to the United States and the rest of Asia. The Bank of Japan returned interest rates to zero last month in a further attempt to encourage growth.

The Bank of England voted unanimously to cut interest rates at its meeting two weeks ago, citing a weakening world economy and suggesting that it is ready to lower rates again. Three of the nine members of the rate setting Monetary Policy Committee wanted to lower the bank's key interest rate by 50 basis points, according to minutes of the April meeting. The rest voted for a 25 basis point cut, the second this year, to 5.5 percent.

The European Central Bank said that the EMU would weather the U.S. and Asian slowdown, which is causing declines in stock prices and damping confidence. The ECB is the only major central bank that has kept its rates on hold. The ECB says that the inflationary impact of past oil price increases along with continuing euro weakness have pushed back a decline in inflation below the bank's 2 percent target. It believes these effects are likely to continue for some months to come, but should gradually diminish over time.

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