Central bankers followed the Olympic relay with one of their own, as the Fed, ECB and BOE each met. No records were broken here—central banks mostly maintained the status quo.
The Fed said it would maintain its target rate of 0-0.25% through at least 2014 and affirmed its commitment to continue “Operation Twist” through yearend. Nothing new, except a slight wording change with the release. Effectively, the Fed vowed to “closely monitor” developments and “provide additional accommodation as needed.” Which won’t come as a shock to anyone.
There’s been much handwringing in the press about whether the US will embark on QE3. In our view, whether or not the Fed does (which we can’t handicap—the Fed isn’t a market function), much like QE2, the tactic likely wouldn’t have much impact. There’s plenty of liquidity in the banking system—just so happens the Fed is paying banks to park excess reserves for now, so that’s just what they’re doing. QE3 probably goes the same way. We can’t see how QE3 (or 4 or 5) much helps anything, but at the same time, at least for now, it wouldn’t much hurt.
As for the ECB, following strongly worded comments from ECB President Mario Draghi last week, many folks expected the bank to release some extraordinary measures to backstop the euro. However, no such measures—status quo maintained. Draghi did note the ECB would stand ready to buy peripheral sovereign debt if countries in need sought it themselves first through the EFSF or ESM. Which really only amounts to planning for a plan, since the mechanics of those facilities’ buying sovereign debt haven’t been determined yet. In fact, the ESM isn’t even fully operational—only 14 of the required 17 eurozone countries have ratified its founding treaty.
Not to be outdone, though many clamored for a big policy move following a seemingly disappointing Q2 GDP result, the BOE maintained its overnight rate at 0.5% and stood by its plan to buy an additional £50 billion in British gilts by November. No change.
Is all this status quo a risk for capital markets? Hardly. First, in our view, the global economy doesn’t much need monetary stimulus at this point. There are pockets of weakness (ahem, eurozone), but the world is growing. And corporations globally are very healthy—US corporate earnings and revenue will likely post the 11th consecutive quarter of growth in Q2 (the same is likely true globally, though the US reports earnings fastest and most broadly).
Pundits are fond of presuming there’s a silver bullet can jumpstart the economy—particularly if it’s a bullet that they aren’t being given. Monetary policy is important—and big central bank errors can be a key cause and/or exacerbating factor for recessions. But at this point in the global expansion, small (or even medium) monetary wiggles likely won’t sway the economy much. That doesn’t mean certain central bank actions aren’t appropriate and can’t help with other aims. But if politicians want a big economic shot in the arm, they should stop praying for QE and start thinking about how to make their economies more competitive—slashing taxes, simplifying regulations, etc.
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