While the unemployment rate in the US is improving (8.3% in March, 2012), personal consumption expenditures index has arisen, and more Americans opine that the national economy is getting better, Bloomberg has reported Federal Reserve Chairman Ben Bernanke recently saying as follows:-
· *US economy was operating way below its level prior to the financial crisis.
· *Increase in household spending was needed to sustain the expansion.
Apparently, other than a general statement, Bernanke stopped short of giving indications what he had in mind in respect of recommendations. Compared to him, the Federal Open Market Committee was more direct to point out that subdued inflation and high unemployment still warranted holding the benchmark interest rate to near zero at least to late 2014.
Mark Gertler, an adviser to the Federal Reserve Bank of New York who has co-written research with Bernanke, said that inflation was contained, employment growth was picking up, and controls were at the right setting . He also said the following:-
· *The Fed’s policy was always subject to change in line with news changes.
· *Seemed like a stimulus, at least from the Fed, was not appropriate for now.
Some policy makers in the US say the Fed should hold off from more accommodation as the economy rebounds. James Bullard, the Federal Reserve Bank of St Louis president, said that with policy seemingly to be on pause, “it may be a good time to take stock of whether we may be at a turning point.”
Latest economic reports lent credence that the world’s largest economy was gaining momentum.
Reading in between the lines of the above statements and contents, I am the more convinced than before that the idea of another round of quantitative easing (QE3) is indefinitely shelved behind closed doors….at least not for this year.
I am curious enough to wonder why Bernanke preferred to make a non-committal statement without referring to any directions in terms of recommendations or actions. Just what was actually in his mind by painting a sketchy picture without the finer details? Was he hinting that he was harbouring some plans in his heart but would not reveal what these were for the moment? Or was he merely suggesting that fellow Americans should not expect the lean times to be over that quickly, and that it might take a while longer for a real revival to materialise. Well, only he himself knows best what should or could be in store for further actions if needed.
My good friend CS Chan, who is a close observer of global economic trends and a fund manager himself, has shared with me his personal views. Chan feels that the Federal Reserve may have run out of tools. Already, US$1.6 trillion in excess reserves had already been rolled out and yet not able to aggressively spur lending or job creation, so what good can another US$1 trillion do? Perhaps, to keep the game rolling on, Bernanke has to project that the central bank possesses the tools, but without providing details or signalling when or whether policy makers might deploy them. In the chairman's speech made on Aug. 26 last year to central bankers and economists at a forum, he said: “In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” To be fair, the Federal Reserve will try something. But like me, Chan is not sure what the “something” will be. Till now, it is still very much about different pundits gazing at different economic crystal balls to predict the likely turn out of events in the world’s dominant economic power by single nation.
As for the greenback, Chan feels USD should strengthen much against EUR, YEN and GBP in the time frame of this year as the latter three are already wounded by their own problems. Thus, unless US shoots own self, USD should strengthen against the other three within this year, possibly by 3Q.
Chan is looking for levels: EUR/USD below 1.2; USD/JPY above 100; GBP/USD 1.5 (he is not so bearish on GBP as it is already at low level).
His views: The Spain problem (even Italy) may re-surface by then. New bailout/”haircut” speculation may heat up. The other pertinent question would be how much German growth could be affected. These could lead to a weaker EUR. As for Japan, the banking sector is not functioning as it should and consumers are behaving like “ostrich”. GBP has been negative for 2 years. The flow to push it down has already accumulated.
Best regards to all.
· *Note: My appreciation to Chan for sharing his views.
· *Special Note: The personal views expressed in this commentary are based on own analysis; therefore these should not be taken as guaranteed actualities or events to take place from henceforth.
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