Fed Meeting On Tuesday Likely to Show Positives in U.S. Economy; Risks Linger with Europe

Fed Reserve Washington D.C.
Fed Reserve Washington D.C.

The last Fed Meeting of the year will occur on Tuesday in Washington D.C. as central bankers are expected to meet and forecast about key economic indicators in the American economy such as unemployment, GDP growth, and inflation. The Fed is not expected to make any drastic new changes with monetary easing at Tuesday’s meeting.

Analysts are expecting the next Fed meeting in January from Jan 24-25th to possibly offer new easing measures related to U.S. monetary policies. The Fed has already purchased 2.3 trillion in bonds since 2008 while holding interest rates near zero  with the range of 0% to .25%. The Fed is expected to keep interest rates in that historically low range until mid 2013.

Although the U.S. market has been weighed down nearly every week by the endless rounds of disappointing and lackluster solutions from Euro zone leaders for paying down their sovereign debts,  the latest economic data from the U.S. has shown some overall improvement.

In November the U.S. unemployment level finally broke the seemingly insurmountable 9.0 % level and moved down 0.4 % to 8.6 %.  The latest consumer spending numbers related to the holiday season has also been better than expected, boosting some much needed confidence in the U.S. economic recovery story. U.S. auto sales jumped in November while the GDP rose to 2.5 % in the third quarter.

Despite these positive developments, the housing market in the U.S. remains disappointing and many state governements across the U.S. are implementing austerity measures as a result of budget shortfalls.

Uncertainty in Europe related to sovereign debt within the European Union, liquidity problems with EU banks, contracting European GDP growth, recession fears, and lingering questions related to fiscal and monetary policies throughout the Euro zone should help to quell any enthusiasm that may be gained from positive U.S. economic indicators at the Fed meeting.

In trading on Monday the Euro fell to a 10 week low versus the U.S. dollar on worries that the new new fiscal pact from the EU Summit won’t do enough to solve the Euro zone’s debt problems. The Euro fell to 1.31 in late trading on Monday compared to 1.33 last Friday.

Concerns about the Euro zone surfaced again in global markets after the three credit agencies Moody’s, S& P, and Fitch all indicated that they wanted to review the Euro zone’s credit and indicated that the EU Summit did not do enough to ease pressure on Euro zone sovereign debt since no decisive measures were adopted.

Moody’s reported that they are considering to lower the credit ratings of all E.U. countries. Moody’s cited “few new measures” being taken at the EU Summit. Moody’s placed 8 Spanish banks and 2 holding companies on review for a possible downgrade.

Fitch said that the EU Summit did little to ease pressure on debt problems that will continue through 2012.

Last week the S & P put the EU’s AAA credit rating on credit negative and put the 15 Euro zone countries under a credit watch for a possible downgrade.

S & P highlighted five important factors that are at the center of the credit debt crisis: tightening credit conditions, rising yields on bonds issued by top rated sovereigns, ongoing political deadlock over how to deal with the crisis, high levels of government and household debt, and risk of recession in Europe in 2012.

On Monday’s Charlie Rose Show shown on Bloomberg, Charlie Rose interviewed Robert Rubin, former Secretary of Treasury and Gillian Tett, U.S. Managing Editor of Financial Times. The conversation flowed to the topic of how Europe is currently responding to their debt crisis compared to how the U.S. responded to their debt crisis in 2008-2010.

Tett spoke about the close collaboration that existed during the beginning of the U.S. debt crisis.

” What got America out of the hole in 2008 was very tight coordination between Tim Geithner, Ben Bernanke, and Henry Paulsen. You had a very tight knit group that was operating and trying to create that in the European situation is very hard because you have to balance off one action against another action across 17 countries” Tett said.

Trying to balance those actions that Tett spoke about will continue to await the Euro Union in 2012 as they move to form a stronger fiscal alliance that holds the necessary firepower to sustain a unified economy and fiscal pact that is truly capable of paying down their looming short term debts while creating building blocks for long term growth and stability.


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