Though the U.S. FOMC has not initiated tighter monetary policy since Davos, POTC believes traders must monitor for signals to the affirmative. We have an equity situation that could return 20%+ (within 3 months) when a more hawkish interest rate tone prevails.
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August 25, 2010 breaking:
WASHINGTON (Dow Jones)--At their annual meeting in the Grand Tetons, the world's top central bankers may provide clues on what, if anything, can be done to help a global economic recovery that's quickly losing steam.
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Some of the world's biggest economies -- notably the U.S. -- are slowing sharply and central banks are looking at what options they have left to bolster growth. That is in stark contrast to June, when finance officials from the main economies met in South Korea as the global recovery was moving faster than expected and central banks were focusing on how to unwind the huge stimulus used in 2008 and 2009 to fight a severe recession.
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The highlight of the Aug. 27-28 meeting of central bankers and academic experts in Jackson Hole, Wyo., is likely to be Federal Reserve Chairman Ben Bernanke's speech, which kicks off the meetings Friday morning. The Fed chief could provide hints on what the U.S. central bank's next move might be. In turn, this could influence monetary policy decisions at central banks from the other big economies.
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With short-term interest rates already at record lows in the U.S., Europe and Japan, the central banks' traditional tool to jump-start the economy is no longer a viable option. But central bankers still have the power to purchase government bonds and other securities, something the U.S. Federal Reserve and the Bank of England did successfully while fighting the financial crisis, by helping to push long-term interest rates down.
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The effectiveness of buying assets in further stimulating the economy is, however, questionable since long-term rates are already at very low levels. Still, it may be the best option left. Governments around the world seem reluctant spend more or cut taxes further. As a result of combating the crisis and the ensuing recession over the past few years, governments now have huge budget gaps, a situation which contributed to a sovereign debt crisis in Europe in May.
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"With most governments on course to withdraw fiscal stimulus, the onus is mostly on central bankers to keep the expansion going," said David Hensley, economist at J.P. Morgan Chase in New York.
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After more than year since output started to grow again in the U.S., the unemployment rate remains at a high 9.5% and the recent increase in jobless claims indicates it could rise further. Home sales plunged in July and durable goods orders rose less than expected, spurring fears of renewed weakening in the broader economy.
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In a move that surprised several Fed watchers, the U.S. central bank decided at its last meeting Aug. 10 to reinvest some $350 billion in proceeds of expiring mortgage-backed securities into U.S. Treasurys to counter a weaker than expected recovery. Only a week before, Bernanke had given no hint of such a move in his speech in Charleston, sticking to the line that the U.S. economy would continue to recover at a moderate pace. The move effectively shifted the Fed's stance back to neutral after officials spent most of the first half of the year focused on "exit strategies."
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Some officials opposed the move, fearing it could send the message that the Fed was too worried about the economy. The other big problem is that buying more assets may not be as effective as in the past. Bernanke's speech in Jackson Hole will be closely eyed to gauge at what point the Fed could step in again to bolster a sluggish economy - and how much fire-power it's ready to use.
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"The threshold (for more Fed action) is going to turn out to be much lower than most (Fed officials) think," said Laurence Meyer, a former Fed board governor now with consulting firm Macroeconomic Advisers LLC. If the Fed does move, Meyer believes it needs to buy $2.0 trillion assets to really have an impact. The Fed bought $1.7 trillion to fight the financial crisis in a program which ended in March and is credited with lowering long-term rates by around half of a percentage point.
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Whether the Fed decides to ease policy could have huge implications for other major economies also preoccupied with slowing growth rates, especially if it leads to a weaker U.S. dollar. If the Fed decides to purchase more assets, it could prompt Japan to also ease policy to prevent the yen from rising further against the dollar.
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Japan's growth slowed sharply in the second quarter as stagnant consumption and flagging exports weighed on an economy already hobbled by a long period of deflation. A further rise in the yen could deal another blow to Japan's export-driven economy.
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Japanese Prime Minister Naoto Kan recently said he would cooperate closely with the Bank of Japan to deal with the impact of a strong yen. The remark suggests the central bank may come under pressure to ease policy. Bank of Japan Governor Masaaki Shirakawa will attend the Jackson Hole event and may discuss the country's easing options with other central bankers. The easiest choice could be for the Bank of Japan to expand a three-month emergency loan facility that was introduced in December.
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A weaker U.S. dollar could also hurt China and Europe. The economy of the 16 countries that share the euro grew at a healthy pace in the second quarter. Germany's best performance since reunification more than offset slow growth in Greece, Spain and Italy -- largely thanks to an export boom that was helped by a weaker euro.
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China, which has benefited from exports thanks to an undervalued currency, has also seen an economic slowdown. A string of reports have largely pointed to a cooling in the pace of growth in what had been a main driver of the global economy's rapid expansion.
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European Central Bank President Jean-Claude Trichet is due to speak at the Jackson Hole lunch Friday, while no official from China's central bank is scheduled to attend.
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(Luca Di Leo, a special writer with Dow Jones Newswires, has been reporting on the global economy since 2000, first from Europe and more recently from the US. He can be reached at 202-862-6682 or via email at luca.dileo@dowjones.com)
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(END) Dow Jones Newswires
August 25, 2010 11:48 ET (15:48 GMT)
Copyright (c) 2010 Dow Jones & Company, Inc.- - 11 48 AM EDT 08-25-10
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