Markets Clamor for Central Bank Action

Article by AlgosysFx

Persistent worries over the state of the global economy, but more so of their own domestic finances, have central banks digging deeper into their policy tools in search of innovative ways to bolster their economies.

The Federal Reserve expanded its Operation Twist last June 20. The People’s Bank of China joined the ECB on July 5 in cutting its benchmark rate, while the Bank of England raised the size of its asset purchases.

Yet, the financial markets clamor for more. And there seems to be reason to ask for more.

The world’s largest economy cooled in the second quarter to the tune of just 1.5 percent. Though this was in line with what economists predicted, household purchases contracted to its slowest pace in a year. Limited job growth has prompted Americans to curb spending while state and local governments likewise cut back on spending. The debt crisis in Europe plus the looming US tax changes threaten to keep the economy’s expansion in check and are hurting sales.

Thus enters the speculations for more central bank action.

In fact, risk assets are riding high on the prospect that central bankers will take action this week to kick start the economy and stem the Euro Zone’s debt crisis.

Both the Federal Reserve and the European Central Bank meet this week, and are anticipated to take some action. Neither is expected to deliver the whole menu of items looked for by markets, however.

According to James Sarni, a Senior Managing Partner at Los Angeles-based Payden & Rygel, some investors doubt more Fed stimulus will work with U.S. yields at record lows. Nevertheless, though most Fed watchers do not expect the Fed to announce a new quantitative easing, or asset purchase program, the central bank is believed to take smaller steps and lay the groundwork for more easing later in the year.

The ECB, on the other hand, was reported to be considering a range of actions. There were news reports last Friday that ECB President Mario Draghi was discussing a rate cut, a new liquidity program, and a plan to give a banking license to its bailout fund.

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