Opinion: As central banks surprise, Fed may have to throw in the towel

The surprises coming out of the Swiss National Bank, the European Central Bank, the Bank of England and the Bank of Canada spell tectonic shifts occurring in the global economy that inevitably will hit these shores.

The Swiss of course unearthed the biggest surprise last week, by ending their policy of buying up euros, but on Wednesday there were at least three further surprises as well.

The surprises started as Bank of England minutes revealed that two hawks no longer supported rate hikes. That’s particularly newsworthy as the U.K. economy, along with the U.S., has been one of the strongest performers of industrialized nations.

Then came news leaks on the European Central Bank’s quantitative easing plans. That the ECB is about to start buying bonds is not a surprise, but the reports that they’ll do so each month is. While some in the market may be disappointed the headline size of 50 billion euros per month is not blockbuster, an open-ended campaign makes it easier for the ECB to continue the purchases and ramp them up.

The Bank of Canada then shocked the market with a quarter-point rate cut, to 0.75%. The Bank of Canada is concerned that the sharp drop in oil prices will not just mute inflation but dampen growth in the export-intensive economy. The central bank even reported concerns that the oil-price collapse will have on foreign demand, exports, investment and jobs growth.

With this backdrop, it seems almost ludicrous that the Fed will just stick to the plan it had in the fall, to start a rate-hike campaign in the middle of 2015.

In order for the Fed to do so, the U.S. economy will not only have to be resilient to some of the overseas pain, and its own domestic energy sector, but the inflows into government bonds and the dollar will have to slow.

St. Louis Fed President James Bullard says the reason yields on U.S. Treasurys are so low is due to overseas investment and not fears over weak domestic growth. But even if right, that’s almost irrelevant. If the Fed starts hiking in this turbulent global environment, it will only accelerate overseas investment here — further dampening already-muted inflationary pressure and making life difficult for exporters, and possibly furthering risky behavior that some on the Fed want to clamp.

The greater concern however is that the U.S. will catch a cold, or worse, from the overseas flu. Already, some cyclical indicators are peeling back.

It’s important to recognize that Fed policy makers really want to hike interest rates, and give the same victory speech over the economy that President Barack Obama delivered Tuesday night. Even doves like New York Fed President William Dudley have signaled that they really want to increase rates this year.

But the number of excuses the Fed will have to postpone any hike keep piling up, and some of them may even be valid.