LONDON • Rarely has the world's most important and powerful central bank been so isolated.
As the United States Federal Reserve prepares the ground for another interest rate hike, most other central banks are moving in the opposite direction. And the divergence is widening.
No fewer than 53 central banks have eased monetary policy since the start of last year, almost all by lowering rates. Indeed, the pace of policy easing nearly everywhere is accelerating even as the Fed nears its second hike of the cycle.
This raises several questions. If the global recovery is firmly rooted, why are so many central banks cutting rates? Can the global economy handle rising US rates and, perhaps, a stronger dollar that follows?
Will the Fed be forced - again - to slow the pace of tightening or even abandon it altogether?
"I can't ever remember a situation when we've seen anything like this before," said Mr Torsten Slok, chief international economist at Deutsche Bank in New York and a former International Monetary Fund (IMF) economist. "When I was at the IMF, there was only one global business cycle. In the late 1990s and early 2000s, it would have been impossible to imagine the kind of decoupling we have today."
The divergence can drive business costs and trade flows, lead to outsized exchange rate moves and highlight vulnerabilities in the global financial system, casting doubt on whether the world can cope with relatively higher US borrowing costs and dollar.
Deflationary forces from the oil price plunge to US$50 from US$115 in the second half of 2014 kick-started central banks into action at the beginning of last year. Fourteen eased policy in January last year, 11 in February and 12 in March. Denmark's central bank cut rates four times in as many weeks.
The number of monthly rate cuts dwindled as the year progressed before the Fed delivered its first rate hike in a decade in December.
But even though oil has rebounded 75 per cent from its multi-year lows, the pace of monetary easing is picking up. Twelve central banks loosened policy in March, 10 in April and 11 in May. Indeed, 11 central banks have begun easing cycles since the Fed raised rates last December.
On one level, the divergence suggests the US economy is on a stronger footing than the rest of the world. The US economy is relatively closed, relying less on trade than many others. Imports and exports account for no more than 15 per cent of US growth. Yet the Fed has already baulked at raising rates, both before and after its December move, precisely because of its fears over the global spillover effects.
Financial markets and emerging economies are the main areas of concern. Both are potentially vulnerable to a rising dollar and higher US bond yields that could follow from higher US rates.
Global conditions, China and the dollar have featured prominently in speeches by Fed chair Janet Yellen and other Fed officials in the past six months, a clear indication they are acutely aware of the global impact of higher US rates.