Why Worry About the Fed When the Rest of the World Is Cutting Rates?

The risk of Federal Reserve rate hikes later this year has almost become a non-issue for global markets. That's because other central banks are headed in the opposite direction.

These policy-making bodies have unleashed a volley of monetary easing actions. Together they are offsetting whatever pall had been cast on the market by the expectation of a forthcoming U.S. tightening.

In general, that should be good for stocks and other risk assets.

Today it was the turn of the Reserve Bank of Australia, which made a surprise quarter-point cut in its cash rate to a new record low of 2.25%. That followed the Bank of Canada -- which cut its bank rate by a quarter point to 0.75% last week to end four and half years of inaction -- and reductions into negative territory by the central banks of Switzerland and Denmark earlier in January, as well as a reversal in earlier hiked rates by those of Russia and Turkey.

More important, these actions came alongside new or increased bond-buying programs from the European Central Bank and the Bank of Japan, the second and third most important central banks for world currency markets behind the Fed. And to top it off, we've had shifts to an easier stance, with differing degrees of subtlety, from the Bank of England, the People’s Bank of China and the Reserve Bank of New Zealand.

Individually, none of those central banks comes close to the Fed in terms of its impact on world markets. But the aggregate effect of their easing actions on the global pool of available liquidity is profound.

Among those central banks mentioned above that have either cut rates in the past month or, like the ECB and BOJ, have embarked on ongoing, large-scale quantitative easing, their currencies were involved in more than 78% of all foreign exchange trading in 2013, according to the Bank of International Settlement’s triennial survey of that year.

Such a tally would mean little if the banks’ monetary easing measures were offset by tightening actions from the Fed. After all, three quarters of the trading volume for their currencies occurs with the dollar as the counterpart.

But not only is the Fed standing pat right now, interest rate markets have pushed out consensus expectations for the first rate hike to a later date. Futures based on the implied federal funds rate are now predicting it will occur in October, whereas a month earlier they were priced for a September move. That leaves a long period of stable U.S. rates within which lower rates and easier policy biases from almost every other central bank of consequence can work their magic on investor risk appetites.

No wonder equities have gotten their mojo back this week.

– Follow Michael J. Casey on Twitter: @mikejcasey.