This week’s market action is going to be dominated by two central bank events. We got the first of these today with the Federal Reserve Open Market Committee’s (FOMC) decision on interest rates, which they predictably left unchanged and nearly zero. What was more important to the market was whether the Fed would extend its zero interest rate policy, a.k.a. ZIRP, until 2015. The Fed only reiterated the need for ZIRP through 2014, and that prompted a bit of selling right after the FOMC statement was released.
Now, some bulls were hoping that Fed Chairman Ben Bernanke and his colleagues would pull the trigger on more quantitative easing, but that didn’t happen. I didn’t think the Fed would step in with “QE3,” and the reason why is that economic conditions here in the United States aren’t bad enough for more stimulus (at least not yet). Stocks are holding up well despite a European-led global slowdown, and there just isn’t enough of a panic factor flowing through the economy’s veins yet for the Fed to begin administering the stimulus injection.
The Fed also is likely waiting to see what happens with the European Central Bank (ECB), which holds its policy meeting on Thursday. The Fed wants the ECB to move first to add liquidity into the global system, and that’s likely what we’ll get tomorrow, at least that’s what everyone expects, given ECB President Mario Draghi’s pronouncement last week that it would do, “whatever it takes to preserve the euro.”
If we don’t get some kind of expected policy response from the ECB tomorrow, global equities will likely come under a lot of selling pressure.
As for today’s message from the Fed, in its FOMC statement, the central bank wrote, “Economic activity decelerated somewhat over the first half of this year.”
The Fed also wrote, “The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
There is nothing really new here, but I read this statement as a sign that the Fed could come out with some form of QE3 if the economy gets much worse in the next few weeks. Remember that the Fed always can call for an impromptu meeting to announce QE3. Fed Chairman Bernanke also will be speaking at the Jackson Hole central banker conference in about a month, and that’s where he first alluded to QE2 two years ago, and that’s the policy that was adopted in the subsequent Fed meeting.
For now, the best approach to this market is to be patient, and wait and see how the ECB meeting turns out Thursday. You also will want to wait and to see the market’s reaction to the release of the July employment report on Friday morning. If that metric comes in well below expectations, it could be the catalyst the Fed needs to pull the trigger on QE3.
If, however, we get more of the same kind of muddling along, anemic job growth of the kind we’ve seen recently, the Fed could very well sit on its hands for a lot longer. Either way, I’m waiting for a definitive trend to develop before committing my chips into the equity pot.
“Courage is grace under pressure.”
The great American author is known for his heroism in battle, his passion for life and his penchant for self-destructive behavior. Hemingway lived through a lot of pressure in his eventful life, but the man always displayed a sense of grace and courage throughout. This is a characteristic all of us should aspire to display.
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To the best within us,
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