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Stocks Rise After US Federal Reserve Announcement

Posted on the 10 August 2011 by Periscope @periscopepost
Stocks rise after US Federal Reserve announcement

The Federal Reserve, Washington Photocredit: jeffgunn

How do you promote growth across the world, in a time of myriad economic crises? Even America, the world’s biggest economy, may be drooping back into recession, with its AAA credit rating slashed – yes, slashed – to AA by the ratings agency Standard and Poor’s. Growth has been much more snail-like than previously expected, both in the US and the world, whilst the Eurozone’s debt problems, like an annoying black sheep uncle, continue to cause problems.

Well, the Committee of the US Federal Reserve wants to promote economic recovery and keep inflation down, so it’s kept interest rates on long-term treasury notes to between 0 to 0.25 percent until at least the middle of 2013. This was passed with a margin of 7 to 3, the first time for almost 20 years that there has been this level of dissent among the policy-making commitee. It’s a controversy that “parallels the broader debate in Washington between those pleading for the government to redouble its support for the faltering economy, and those who doubt the utility of additional aid and fear the consequences of the vast efforts already made.

So, after a bit of market volatility, stocks across the world have risen in response, with London’s FTSE 100 share index up 1.4 percent, and Frankfurt’s Dax index more than – whoah – 2 percent higher. Even the Dow Jones has gone up 4 percent, whilst in Asia the picture’s also a little rosier, with Japan’s Nikkei index up 1.1 percent and Hong Kong’s Hang Seng lifting itself up by its bootstraps to the tune of 2.1 percent.

But the gods of economy are not yet appeased. The short-term interest rate in the US has already been near zero for two years, allowing lots of ‘free’ money; the Federal Reserve’s adjustment to long-term interest rates is a modest step. The financial waters will remain turbulent as worries about the world continue. One wonders what libations will need to be poured to quiet these particular seas.

  • Market volatility. It was “another wild day on Wall Street,” reported Graham Bowley and Christine Hauser on The New York Times, as after the announcement “stocks climbed, then dropped, then rocketed as traders did a double take on the Federal Reserve’s much-awaited statement on the economy Tuesday afternoon.” Stocks first dropped, then  rallied as investors understood that keeping two-year bond rates “close to zero” could be a big economic stimulus. With bond yields down, there’s few other options for investors than the risky stock markets.

“A lot of traders will be disappointed that the Fed did not go any further,” Robin Bew of the Economist Intelligence Group.

  • Showman’s gesture. The Fed is admitting that there is no prospect of growth, wage rises or job increases, said Binyamin Applebaum, also  on The New York Times. This “showman’s gesture,” it hopes, “will spur investment and risk-taking.” But economists say this move is “unlikely to drive significant growth.” The real problem is lack of consumer demand, spooked businesses and a smaller public sector. Many are asking why the Federal Reserve isn’t doing more; the Fed has responded that “it’s already engaged in an immense program of economic aid.” Inflation has abated, as the Fed predicted, showing confidence in their judgement, but the central bank says it will “consider additional options.” Markets eagerly await their next pronouncement.
  • Mr Glum. What this means, said Robert Peston on the BBC, is there won’t be a recovery for at least two years. All this cheap money hasn’t returned us to “better-than-anaemic” growth. What’s true of the US is true for the UK and the rest of Europe. Though shares have risen, we shouldn’t be euphoric. There is more gloom ahead.

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