Federal Reserve Chairman Ben Bernanke’s expected announcement of a QE3may have been Factored-In by the Equity & Commodity Markets a bit too soon, even before Bernanke has uttered a word.
Markets may get disappointed since the US Federal Reserve may “Strike Only When The Iron Is Hot.” The small but steady declines in the Equity & Commodity Markets, since Tuesday seem to point out that the markets may have realized this by now. As the realization penetrates deeper, declines & market movements may get more volatile. Commodity Markets project a mildly bearish posture for Gold, Silver & Crude Oil for a couple of days.
Federal Reserve QE3, an Assured Future Event:
The Federal Reserve may certainly want to keep the biggest ace up the sleeve & maintain a ready stance, just in case the Economic scenario worsens and strong action is needed further down the road. Bernanke may outline what the Federal Reserve has done to help stimulate the economy so far, & further at most discuss a roadmap & also provide a little bit of more information on what would trigger them to act, if & when time calls upon. That is just what the Fed has been hinting, all the while repeating,
“We will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed.”
The worsening European crisis & a slowdown in China may surely be a point of concern for the Federal Reserve currently, But I think Bernanke may want to wait & watch how the EU leaders tackle the burning issues of the Debt ridden Eurozone with the coming ECB policy meet on Sep 6th, & also since China is expected to infuse some kind of easing in the next few days. ECB President Draghi is likely concentrating on the Sep 6th ECB policy meet & the Sep 12th German constitutional court decision regarding Germany’s part in the bailout of the Eurozone. After having known the details of both these crucial announcements, the US Federal Reserve will have a better understanding of the EU’s latest efforts.
The August US employment report coming in the first week of Sep would also be a key factor for the Fed in analyzing the need for a QE3. The Federal Reserve, after having all facts, data & figures would then also have an opportunity to lay out a strategy & may use the same optimally, to make changes (If required) on Sept. 13 at the FOMC meet if New Changes do occur. Draghi’s cancellation of attending the Jackson Hole Symposium also raises expectations that he could make a big announcement at next week’s monthly ECB – European Central Bank meeting slated for Sep 6.
In an article published in German’s Die Zeit newspaper, ECB President Mario Draghi said that the central bank needs to employ “exceptional measures” with monetary policy, while acting within its mandate. Reports suggest China’s central bank is looking to inject more liquidity into the country’s banking system, in order to stimulate economic growth. European actions to contain the sovereign debt crisis & US Economic data leading up to the upcoming September FOMC meeting could determine what the Fed actually does.
The chances of QE3 will rise significantly & swiftly on a weaker than expected employment number. The Gold, Silver & other Financial Markets remain subdued ahead of these key events.
Bernanke is most likely to keep his tone & stand unchanged when he speaks at an annual Federal Reserve symposium in Jackson Hole on Friday. A fairly larger number of FOMC members favored further easing if the economy does not improve substantially fairly soon, led to the upside momentum in almost all markets last week, including precious metals, particularly ahead of Jackson Hole since Bernanke used this gathering to signal a second round of quantitative easing back in 2010.
Times have changed & so will the usage of Monetary & Fiscal Policy Tools:
There has to be some sort of a consolidated effort. The same kind of earlier efforts implemented today, will not be much beneficial as were two or three years ago. Higher Interest rates & bond yields in 2010 allowed the Fed more room to maneuver & have a higher impact out of its monetary infusions. Fiscal Policy & not Monetary Policy may be the need of the times as being observed in many nations now & Bernanke aptly has repeatedly called the Congress to help revive the economy. Monetary Policy changes or Quantitative Easing is surely not going to bring down the Un-employment. Manufacturers are reducing production, thereby reducing employment, due to a global slowdown & a slump in exports all around. Lower Interest rates also are not an attractive factor, with most companies being flush with funds.
Effective Economic Tools – Monetary Policy & Fiscal Policy:
Courtesy CommodityTradeMantra.com – Comprehensive market intelligence
The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.
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