Words, Not Action by Tim McLaughlin
Following the FOMC meeting/announcement on Wednesday and the ECB (European Central Bank) meeting on Thursday, the market was initially left disappointed that neither committee did much to fortify what is unquestionably a very skittish market at this point.
That said the statements, in reality, were extraordinarily strong, and nowadays, words are apparently the new bullets.
In the end, both Ben (Bernanke) and Mario (Draghi – President of the ECB) did not disappoint. They delivered strong messages that show explicit intent to provide aggressive accommodation in the event economic conditions do not improve, or worse, deteriorate further.
There were no “tangible” preemptive strikes, but the Fed and the ECB laid out very clear plans for the rest of the year. Importantly, the Fed is as close as it was in late 2010 to delivering more accommodation. And the ECB changed two very key features of its current policy stance, which were received positively in the global marketplace:
1. In order to ensure the proper transmission of monetary policy, the ECB may now undertake unsterilized and unlimited short maturity sovereign bond purchases for any member that accepts and abides by EFSF/ESM program terms.
2. ECB seniority will likely be revoked.
These are significant changes and they are very much a part of the plan to “do whatever it takes to save the Euro”. The markets may need some time to digest what has happened this week, but all in all a comforting overview that both committees will not jump the gun but are unafraid to act if/when needed.
The FOMC also noted that:
– Growth in employment has been slow in recent months, and the unemployment rate remains elevated.
– Business fixed investment has continued to advance.
– Household spending has been rising at a somewhat slower pace than earlier in the year.
– Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
