Fed Diverges From Global Peers in New Era of Higher for Longer

The Federal Reserve’s move to signal fewer interest-rate cuts this year deepens its divergence from peers who have already begun to ease.

The message from the Fed was two-fold: Not only are officials now only anticipating one rate cut this year, compared to the three they projected as recently as March, but they also see its easing cycle bottoming out at a higher level than previously expected, underscoring the era of higher rates is set to stay.

Central bank watch

That’s in contrast with the Bank of Canada, which lowered its benchmark overnight rate by 25 basis points to 4.75% last week, making it the first Group of Seven central bank to kick off an easing cycle. The European Central Bank soon followed, lowering its key rate by 25 basis points to 3.75%, while the Swiss National Bank made its move to cut in March.

For the world economy, divergence from the Fed matters. Higher US interest rates stoke dollar strength and will continue to lure foreign capital away from rival economies, especially emerging ones.

The Fed staying on hold raises questions around harmful foreign-exchange volatility and risks undermining progress on getting inflation down, according to analysis by Bloomberg Economics.

“The overall theme for western, developed economies is that we’re on the road to cuts but it won’t all happen at once,” said Kristina Hooper, chief global market strategist at Invesco. “The Fed is not in the lead this time. Last week was historic in that we saw two G-7 central banks cut rates, neither of which was the Fed.”

Fed Chairman Jerome Powell did little on Wednesday to encourage bets on a near-term rate cut.