By Anne D. Picker, International Economist,Econoday
Monday, February 5, 2001

The Fed does the expected and so does the ECB
One almost could hear traders drumming their fingers on their desks while they waited for the two day Federal Reserve meeting to end and confirm their expectations for a 50 basis point interest rate. The Federal Reserve did not disappoint - lowering the Fed funds and discount rates by 50 basis points each to 5.5 and 5.0 percent, respectively. And the accompanying statement emphasized that the Bank was willing to do more if economic conditions warranted. Needless to say that the plethora of U.S. economic data released last week was dissected to see by how much more the Fed might cut even before their next meeting March 20.

The European Central Bank also lived up to its advance billing and left interest rates in the European Monetary Union at 4.75 percent. The Fed move narrowed the spread between U.S. and EMU interest rates to 75 basis points. In his press conference following the meeting, ECB president Wim Duisenberg said the Bank had a wait and see attitude. He said that although inflation and M3 money supply growth were moderating, given the upside risks, the ECB was still watchful for inflation. The ECB currently views potential wage increases as the greatest risk to inflation and hopes that wage demands remain moderate in the upcoming round of negotiations. Duisenberg also emphasized the need for continuing structural reform and fiscal discipline.

There is no single ECB position on what Fed rate cuts mean for Europe. Otmar Issing, ECB chief economist, said the ECB is independent of Fed policy. Duisenberg and others think the 12 member states of monetary union are better protected as a group against external shocks than they would have been if they had to deal individually with the current global economic environment. But others suggest that Fed actions could play an important role, especially after the 50 basis point Fed cut and prospects of more to come.

Overseas markets were subdued and maintained an even keel despite disappointing earnings projections and economic uncertainty. Although European markets were affected by the Nasdaq's 4 plus percent drop, investors seem to be taking things more in stride, a trend apparent since the Fed's surprise rate cut on January 3. This is evidenced by the performance of the equity markets during January. Only the Japan Nikkei and Paris CAC are down, and only marginally, while all others tracked here have posted gains. (See table below.)

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead