Tossing in the backwash on monetary policy

There's nothing so satisfying for a central banker as catching the markets on the hop. Now would be the ideal moment for the US Federal Reserve and the German Bundesbank to have a go at reversing the fall of the dollar against the mark.

Since everybody is assuming no change at either the Fed's meeting today or the Bundesbank on Thursday the impact of a rise in US rates and a fall in German rates would be all the greater. But don't hold your breath, because they probably won't feel inclined to make a move.

The confident market belief that interest rates are on hold has been reinforced by figures from both the US and Germany. Home sales in the US had been expected to increase in February. Instead they fell again - a further indication of the weakening in the domestic economy.

Meanwhile the March provisional figure for consumer price inflation in Germany came in at 2.4 per cent, disappointing the Bundesbank President, Hans Tietmeyer, who last week described inflation of 2.4 per cent as "still too high".

The reality is that both central banks have their eyes firmly fixed on their domestic economies rather than on currencies. Mr Tietmeyer made this explicit when he declared last week that "monetary policy cannot and must not be oriented to exchange rate developments." As for the Fed, tolerance within the US of a falling dollar remains high, particularly since on a trade-weighted basis its strength against the Mexican peso and Canadian dollar has compensated for its decline against the yen and mark.

Viewed from Frankfurt, American policy appears dangerously slack. Inflation in Febuary was running at 2.9% and unemployment is now well below the 6% rate generally regarded as the trigger for an upsurge in inflation.

If the Bundesbank were to swap chairs with the Fed today, it is hard to imagine it showing as much sympathy for concerns about engineering a soft landing for the US economy by holding interest rates unchanged. But swapping chairs again, German policy must equally seem too tight to an American. An objective of inflation at 2% or below looks like misplaced zeal when unemployment remains high.

It is this fundamental difference in perspective that explains why there is so little likelihood of exchange-rate co-ordination either this week or in the foreseeable future. That leaves the UK tossing in the backwash as the two key arbiters of world monetary policy steer their divergent courses.

"Wait and see" may make domestic sense to the US Fed and German Bundesbank, but it could well make for seasickness at the Bank of England as it ponders whether the currency markets will force its hand on interest rates

Since everybody is assuming no change at either the Fed's meeting today or the Bundesbank on Thursday the impact of a rise in US rates and a fall in German rates would be all the greater. But don't hold your breath, because they probably won't feel inclined to make a move.

The confident market belief that interest rates are on hold has been reinforced by figures from both the US and Germany. Home sales in the US had been expected to increase in February. Instead they fell again - a further indication of the weakening in the domestic economy.

Meanwhile the March provisional figure for consumer price inflation in Germany came in at 2.4 per cent, disappointing the Bundesbank President, Hans Tietmeyer, who last week described inflation of 2.4 per cent as "still too high".

The reality is that both central banks have their eyes firmly fixed on their domestic economies rather than on currencies. Mr Tietmeyer made this explicit when he declared last week that "monetary policy cannot and must not be oriented to exchange rate developments." As for the Fed, tolerance within the US of a falling dollar remains high, particularly since on a trade-weighted basis its strength against the Mexican peso and Canadian dollar has compensated for its decline against the yen and mark.

Viewed from Frankfurt, American policy appears dangerously slack. Inflation in Febuary was running at 2.9% and unemployment is now well below the 6% rate generally regarded as the trigger for an upsurge in inflation.

If the Bundesbank were to swap chairs with the Fed today, it is hard to imagine it showing as much sympathy for concerns about engineering a soft landing for the US economy by holding interest rates unchanged. But swapping chairs again, German policy must equally seem too tight to an American. An objective of inflation at 2% or below looks like misplaced zeal when unemployment remains high.

It is this fundamental difference in perspective that explains why there is so little likelihood of exchange-rate co-ordination either this week or in the foreseeable future. That leaves the UK tossing in the backwash as the two key arbiters of world monetary policy steer their divergent courses.

"Wait and see" may make domestic sense to the US Fed and German Bundesbank, but it could well make for seasickness at the Bank of England as it ponders whether the currency markets will force its hand on interest rates

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