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Fed holding rates steady while the ECB cuts. Who will blink first?

A snippet from Bank of Montreal on the new widening monetary policy divergence, addressing “how long Powell can retain terminal as the ECB and Bank of Canada have started normalizing rates lower’.

There are a few conceivable outcomes assuming that global central banks aren’t comfortable with an ever-widening divergence of policy rates

1. FOMC could begin cutting in September – an assumption that will either be supported or challenged on Wednesday

2. the ECB and BoC could pause after lowering rates another quarter-point or two – characterizing the effort as ‘fine-tuning’ rather than the beginning of a steady march toward neutral

3. Another, far less likely outcome would be another surge in global inflation that leads the ECB and BoC to reverse course – never say never, but such a shift would take a long time to come to fruition

This leaves the debate split between the FOMC cutting or the ECB/BoC ending after a couple cuts. Time and the data will tell; for now, we’re of the mind that the Fed will lower rates before the ECB/BoC finish cuts.

This is interesting stuff from BoM, and gels with the take I posted yesterday from Goldman Sachs, who suggest that other global central banks cutting rates increases the pressure the Fed will feel to cut also.

I’m not convinced the Fed will bow to such pressure, overt or otherwise. A far more juicy outcome would be number 3 from BoM, above. ECB Governing Council member Holzmann is indicating he is leaning that way. Although he may be spoofing us. We’ll see.

The Federal Open Market Committee (FOMC) meeting is this week. The Statement id due at 2pm US Eastern time on Wednesday, with Powell’s news conference following 30 minutes later.

This article was written by Eamonn Sheridan at www.forexlive.com.

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