US Fed Still Expected to Announce New Stimulus

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US Fed Still Expected to Announce New Stimulus

US Fed Still Expected to Announce New Stimulus



All eyes will be on Ben Bernanke today as he gives his words of wisdom at Jackson Hole.

As indicated by the Dow's three digit fall last night, investors' expectations of any radical announcement have been quashed.

The central banker has got his hands tied behind his back as he isn't supposed to announce official policy decisions at the symposium. Nevertheless, this hasn't stopped him from giving significant hints in the past.

Whilst markets may be disappointed by what Bernanke has to say later today, the Fed is still expected to announce new stimulus at the next FOMC meeting on 13th September.

Even though this week's US GDP figures received a little upgrade to 1.7%, there is still a disconnect between the GDP number and the GDI, gross domestic income. This came in far lower, at just 0.6%, indicating that the real level of growth in the US economy is somewhere in between the two.

Growth of around 1% is not enough to bring US unemployment down, and even though the last Non-Farm Payroll number was a ray of light, the rate of unemployment still ticked up.

This is only one of the many arguments that the 'stimulists' have used to suggest that QE3 is needed to prevent declining inflation and another recession from taking hold.

Ultimately, it's the fear of deflation that is the biggest argument in favour of more stimulus. This has been the driving force behind Bernanke's previous QE programs and he won't want to risk it happening in the near future.


Wall St Index Chart

Wall St Index Chart


If neither the Fed nor the ECB announce something significant over the coming weeks, it seems likely that the markets will see mounting pressure to the downside.

As mentioned, the Dow Jones was knocked off its perch yesterday, but this was also down to continued fears over the deepening European debt crisis.

On top of that, Japan joined the club of countries foreseeing a deterioration of the global economic picture.



By Simon Denham, 31 August 2012


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