G20 Cooperation Is Good, But Not Enough

* A quick summary of the trajectory of policy: Fiscal and monetary policy is expected to be relaxed further in the United States. The lame-duck Congress may pass some measures, including economic stimulus measures like extending unemployment benefits, in the coming weeks, but a larger package is expected to be passed early next year. A key near-term issue is the policy response to the stress in the auto sector. The Federal Reserve is widely expected to cut the fed funds target by 25 basis points to 0.75% at the mid-December FOMC meeting. Note that the effective fed funds rate has remained below 50 basis points since late October.

China is expected to reduce interest rates and reserve requirements before the end of the year and continue easing monetary policy next year. More details of the $586 billion fiscal package recently announced continue to leak out. The Bank of Japan shaved its overnight target rate to 0.30% from 0.50% and appears reluctant at this juncture to consider another rate cut. The government unveiled a 5 trillion yen (about $50.8 billion) fiscal package on Oct. 30. This follows on the heels of an 11.5 trillion yen package introduced two months earlier.

Several euro-zone countries have introduced some fiscal measures. Of note, the German cabinet approved a 12 billion euro stimulus package, which included 5 billion euros for infrastructure investments and tax incentives for home improvements and energy efficiencies. It also abolished a tax on car purchases for a year. France's Sarkozy has also committed to fiscal stimulus. The European Central Bank has cut rates by 100 basis points since the beginning of October, and further cuts are expected. We expect a 50 basis-point cut in early December to bring the refi rate to 2.75%. The Bank of England surprised the market with 150 basis-point rate cut at the start of the month on top of the 50 basis-point cut that was part of the coordinated move in early October. For the first time since the monetary union on the continent, U.K. base rates are below the ECB's refi rate. That discount likely will widen next month. That's when we expect the BOE to deliver another large rate cut of 100 basis points. Chancellor of the Exchequer Darling will likely unveil a stimulus package of both tax cuts and spending increases with his prebudget report on Nov. 24.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.