The ECB and Federal Reserve Play Stimulus Chess

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The ECB and Federal Reserve Play Stimulus Chess

The ECB and Federal Reserve Play Stimulus Chess



All eyes will be on the US Federal Reserve tonight as they announce their latest interest rate decision.

There is an expectation in the financial markets that if they don't start another round of stimulus now they will give a clear signal that something is planned in the near future. Most likely in September when they meet again.

The rationale behind pumping more money into the system in order to keep the economy growing is simple enough. The US economy is slowing and it's slowing at a worryingly quick pace.

To see your GDP fall from over 4% half a year ago, halving in the following quarter and then dropping off to a mere 1.5% in the last quarter is enough to concern any central banker who's responsible for employment and growth.


Alarm Bells

Alarm bells are ringing even more than usual with US growth rate below the 2% mark. For the US it has historically been the case that a drop below 2% is the point of no return and a recession is soon to follow.

It's the vicious circle where growth slows, business confidence fades, investment plans are scaled back, hiring is curtailed and consumers cut back their spending.

The only thing that the US economy has got going for it at the moment is that a recession was averted last year when growth slowed to 1.2%. And there's every chance it could be avoided again.

The labour market has been improving just enough and confidence, as evidenced by yesterday's consumer data, is providing the support for the economy.

Nevertheless the US is in a very precarious position and if there was any shock, yes you guessed it - Europe - the US could quickly find itself back in a recession.

It's the Eurozone that remains a huge threat to the US economy and global growth as a whole. The ECB needs to make the first move, the Fed can then assess the European actions before taking their own.

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By Simon Denham, 1 August 2012


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