Monetary stimulus and it impact on global markets will come into focus this week as investors attempt to gauge the level of commitment from central bankers to keep their monetary stimulus programs running by keeping interest rates low and ensuring the market has wide access to liquidity.
Aggressive monetary policy actions taken by central bankers across the world at the beginning of the Great Recession in 2008 helped to improve the strength of the global economy, allowing the U.S. equity market to surpass their 2007 highs.
On Wednesday, the Federal Open Market Committee (FOMC) will announce their latest monetary policy decision.
Most economists are expecting the Fed to announce that it plans to keep up their $85 billion a month bond buying program which consists of a $40 billion a month purchase of mortgage backed securities combined with a $45 billion a month purchase in Treasury securities.
The following day on Thursday the council in the European Central Bank (ECB) will decide if it is time to lower interest rates further or keep rates steady at .075.
Economists expect that either on Thursday or else later in early June the ECB will decide to lower interest rates by another .025 basis points to help stimulate growth in the euro-area.
Lowering interest rates by another .025 is expected to stimulate more business and investment activity across a weakened euro-area economy that continues to face the brunt of austerity measures and high unemployment.
Federal Reserve Minutes
On Wednesday April 10th the Federal Reserve released their meeting minutes which supports the view that the Fed’s loose monetary policies will remain in place for a while longer. After the Fed minutes were released, global equity markets rallied across the board.
Wells Fargo released a market note that summed up the market reaction to FOMC meeting minutes.
“Reduced fears of tightening monetary policy is helping lift the market after the FOMC minutes showed a majority of the Fed is still opposed to tampering (with) its bond-buying program.”
Last Friday, the Commerce Department revealed that gross domestic product (GDP) grew at a 2.5 percent annual rate in the first quarter of 2013 which follows a fourth quarter 2012 GDP reading of only 0.4 percent.
Economists were expecting a 3.0 percent growth rate for the first quarter of 2013.
One important factor that is often weighed by the Fed when determining whether to continue monetary stimulus is the level of inflation in the U.S. economy.
Last Friday, it was reported that U.S. inflation rose to just 0.9 percent, the smallest increase since early 2012. Low inflation provides the Fed with a safe economic environment to extend its loose monetary policies.
Another factor that is closely examined is the unemployment picture in the U.S.
The latest jobs report for March showed that U.S. employers added just 88,000 jobs while the unemployment level dropped to 7.6 percent solely because more Americans stopped looking for work.
Weak job hiring in the U.S. combined with a low inflation level are some of the primary reasons that many economists predict that the Fed won’t ease up with their $85 billion a month bond buying program.
Modest growth is expected for the United States in 2013. The Congressional Budget Office (CBO) expects that economic activity in the U.S. will expand slowly this year, with real GDP growing by just 1.4 percent.
As $85 billion in government related sequester cuts gain traction across the United States, the CBO estimates that the cuts will count towards about a 0.6 percentage point drag on economic growth in the 2013 fiscal year, ending on Sept 30th.
The lower marginal growth rate from the sequester cuts combined with the 2 percent increase in the payroll tax for Americans which began in January may add some new challenges for the U.S. economy in 2013 as the Fed decides the fate of its monetary stimulus plan.
On Friday the non-farm payroll report for April will be released from the Department of Labor followed by ISM and March factory data.