September is the month of the Central Banker. We were ushered in on Friday by Ben Bernanke and his speech from Jackson Hole, in which he once again pledged to increase monetary stimulus should economic conditions warrant. He also fired a firm shot over the bow of those doubting the effectiveness of his policy actions to date. Bernanke believes that the persistently high unemployment rate in the US has little to do with structural changes within the economy (a mismatching between job openings and skills that must be addresses by fiscal policies) and everything to do with monetary conditions that he can affect, such as credit conditions and a subdued housing market. Given that interest rates are at zero and he has already bought $2 Trillion worth of assets from the open market, one wonders what he can possibly do next to stimulate a stubbornly slow recovery. The latest FED decision will be announced September 13.
Not to be out done, ECB Chairman, Mario Draghi, has been talking tough for weeks as to how he will save the euro zone from itself by doing “whatever it takes”. The ECB meets this week and will announce its latest policy decision Thursday September, 6th. Leading up to the meeting the market has received all sorts of rumours of possible action. The latest version is that the ECB is looking into buying short-dated sovereign government bonds that expire within three years. Now in strict terms, this is outside of the ECB’s mandate as it amounts to monetary financing of a sovereign country. However, Draghi believes that such action would help to stabilize the euro, and since a stable euro is within his mandate such action would be warranted.
These two meetings will have significant impact on financial markets and currencies. If policy makers do follow up on their tough-talk then look for the USD to lose a bit more value and for the EUR to continue its recent rise.
Source: Sungard MarketMap 2012
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