By Anne D. Picker, International Economist,Econoday
Monday, March 26, 2001

The Federal Reserve, as expected, lowered its policy making fed funds rate 50 basis points to 5 percent Tuesday. This didn't thrill the equities markets in North America to put it mildly (Asian and European markets were already closed for the day). Stocks plummeted and then fell some more on Wednesday and Thursday, as investors continued to register their displeasure. The markets still are ignoring the fact that the Fed, or any other central bank for that matter, is not there only to bail out investors. It must consider other economic variables as well in the policy decision process.

The Swiss National Bank at its first quarterly monetary policy meeting this year unexpectedly cut the target range for its benchmark interest rate 25 basis points, the first such move since April 1999. The range for the benchmark three month Libor is now between 2.75 and 3.75 percent. The bank acted because the risks in the international environment have increased. Switzerland's European neighbors, particularly Germany, are showing signs of slowing as they begin to feel the effects of the U.S. economic slowdown.

The ECB continues to swim against the tide and is alone among major central banks in not following the Federal Reserve in cutting interest rates. But there appeared to be a hint of change in sentiment by ECB spokesmen last week. Needless to say, market commentators are now parsing every word and inflection in an effort to see if the ECB stand on interest rates is really softening. Now market players are saying that the ECB will ease on Thursday. And, like they did prior to the Fed meeting, they are bidding up the amount of the cut.

On Monday - what seems a long time ago - the Bank of Japan tacitly admitted they made a mistake in August when they raised their policy making interest rate to 0.25 percent and dramatically tightened monetary policy. The bank returned to ZIRP, zero interest rate policy, and pledged to speed up money supply growth to improve liquidity. They also vowed to keep the new policy in place until consumer prices stabilize above zero.

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