The European Central Bank did not move its benchmark interest rate this week, keeping the rate at zero.
The ECB and the Federal Reserve seemed to have been playing games with one another over the past year and one half, ever since the Fed halted its third round of quantitative easing.
The script then seemed to read that the Fed would begin to raise interest rates in 2015… possibly two increases.
But, along came the ECB, who had been going back and forth with the idea of beginning its own round of quantitative easing… and started its own brand of quantitative easing… along with declines in interest rates.
It seemed as if Mario Draghi, president of the ECB, kept resisting a move, wanting to make sure that there was sufficient information and support for such a rise.
This put the pressure on the Fed and so the Fed kept postponing interest rate increases during the year.
The Fed, as I have written many times, began to remove reserves from the banking system in October 2015, preparing banks for a future increase in rates, and then finally raised its policy rate of interest in December.
The "forward guidance" given at that meeting was that the Fed would raise its policy rate four times in 2016, each time the increase would be one quarter of a point.
But then January came and world financial markets became quite jumpy. The ECB moved to lower its policy rate and indicated that it was ready to do more in the future.
Pressure began to build on the Fed. Fed officials weakened and started to back off on its "forward guidance" and indicated that maybe there would not be so many increases.
In February, the financial market volatility continued. At its March meeting, the Fed backed off. It did not raise rates as it had indicated it might. Federal Reserve actions as discerned movements in the balance sheet could be interpreted as indicating that as early as February, the Fed had no inclination to raise rates in March.
Then the week after the meeting, a rumor started going around that central bankers at a recent G-20 meeting had agreed to work to stabilize foreign exchange markets.
Now, we have the ECB backing off as well, keeping its benchmark interest rate at zero percent.
If the story about the agreement of central bankers to stabilize foreign exchange markets is true, then the ECB did not move in order to conform to this agreement.
The non-move also served a second purpose in that the Germans have been arguing against such an increase, and by not taking any action, German complaining could be ended.
Mr. Draghi did not totally change his position on quantitative easy, however. Tom Fairless writes in the Wall Street Journal that "ECB Leaves Door Open for Further Interest Rate Cuts," and Jack Ewing writes in the New York Times that "ECB Stands Pat at Meeting, But It Explores Next Options."
Just as Mr. Draghi was not anxious to move the ECB into a mode of quantitative easing, he seems to be equally reluctant now to back off from a policy of quantitative easing, exhibiting concern that the central bank should not move too quickly and abort any recovery that might be underway.
Now, the ball is back in the Fed's court.
And, the speculation now is that the door is open for the Fed to go ahead and raise its policy rate.
Ira Iosebashvili writes in the Wall Street Journal that the mood has shifted somewhat on this possibility. He writes:
"Federal funds futures, used by investors and traders to bet on central bank policy, late Thursday showed a 65 percent likelihood of a rate increase by the end of the year, up from 54 percent on Monday… Chances of a June increase stand at 21 percent, the data showed."
The underlying plot… if the Fed had moved up in March, markets would not have been prepared for such a move. So, with the Fed holding still in March, the ECB could hold still in April and set the stage for a Fed increase in June. The value of the US dollar rises against the euro and the ECB does not have to take short-term interest rates further into negative territory.
And, if this is true, the two central banks are working together and not at war in trying to manipulate their interest rates on their own to just serve their own purposes.
It's a nice story.
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