As of today, December 12th, the NY stock market can be described only as confused.
Yesterday, general disappointment overwhelmed the stock market circles after the FED’s announcement. The ‘modest’ actions frustrated everybody and the market literally dropped dramatically to. Everybody expected a significant decrease in the target rate and the stock prices were prepared to shoot up. However, a reasonable person who is not thinking only about stocks is thankful to the Chairman, Mr. Bernanke, and the rest of the board of governors, because they aimed their action at stimulating growth and avoiding inflation. Inflation, as most third-graders should know, is the worst.
Today the stock market shoot up in the morning and then dropped down again in the afternoon. It closed at 0.31% rise – pretty modest having in mind the air of excitement around the meeting of the FED. That marked a second ‘bad’ day for the stock market after the actions of the FED which were anticipated with excitement. The signal cannot be worst than that. If most investors loose their confidence right now, recession would be at hand.
I promised a historical account related to recent events and it will be up soon.
The title is pretty eloquent. Enough is said to reflect on the possible outcomes of this ‘modest’ monetary policy action as some of the stock market brokers saw it after they heard Mr. Bernanke’s afternoon announcement.
The FED apparently fears a serious slowdown of the US economy (which would naturally cause a slowdown in the whole world) because of the looming credit crunch, the sudden depreciation of the prices on the US real estate market and the decrease in aggregate spending of both consumers and business decision-makers.
I am sure that the FED realizes they are in a ’sticky’ situation between the threat of economic contraction and the rising threat of inflation. If we put aside for a moment the strictly domestic problems of the US economy and focus on the international picture, more serious problems emerge. There is the depreciating dollar (which fortunately stood firm today and in fact appreciated slightly, possibly because of the new monetary policy moves) which will definitely be affected to a lesser or greater degree by the change in interest rates. The problem here is that the loan made in US dollars becomes cheaper with a whole percent than several months ago (on theory). Therefore, if the rest of the major national reserve banks in Europe and East Asia do not lower their interest rates, the new monetary policy, as of today, will possibly drive down the US currency even more. That of course, should be prevented by a efficient cooperation between the central bankers worldwide and nobody doubts that collective efforts will be made to marginalize the losses from the crisis.
On the other hand, we have the problem of inflation. Driven up by dramatic rise in price of oil to a new record high and energy prices as a whole, plus a rise in crop prices. These factors combined can cause serious inflation to spread in other sectors soon and would not be forgotten by the US policy makers.
Moving to the other side of the world, to China, we see that the Chinese also face with high oil prices and in fact oil shortages caused by less efficient artificially controlled environment (the government prefers to have low oil prices instead of adequate oil supply). Today, China is seriously threatened by all-sector inflation cause by the rise in price of oil. On the other hand, China faces a dollar depreciating against its own ‘Yuan’ which is not good for the country because it looses its advantage of a lower Yuan to widen a gap of a foreign debt for the USA. Therefore, recent events are anything but profitable for China. Moreover, people should remember how the dollar emerged as the British pound sterling of the Post-WWII world through Breton Woods II.
In conclusion, we should say that the FED made a big mistake with their fresh announcement. The Open Market Committee probably underestimated the psychological effects of the news coming from their meetings because this time no clear signals about inflation or growth were given and the business community is confused. Apparently, business decision-making should use its intuition and it seems that the FED left the community partly on its own this time.
Well, it is interesting that I finally created my blog amidst such interesting events on the world scene. Sometimes when I read a magazine or a newspaper about politics and/or economics I feel that people generally do not appreciate how interesting and complex the world actually is. Today, I am waiting for a announcement by the New York FED and the most respectful Mr. Bernanke which will clarify what moves the US monetary policy would make to avoid any unfortunate events in domestic and international perspective. Mr Bernanke will also clarify the eventual intervention of any fiscal policy which can be performed by the Bush’s Administration in order to cooperate with the Federal Reserve System and prevent a feared recession through a collective effort. However, the more important issue regarding the FED’s actions and views is how are they gonna pave the future of the dollar in the international trade scene, in times so distressful for the ‘greenback.’
The title of this entry probably looks like a brave statement. However, people should remember the lessons of history. In the end of WWII the British pound sterling went through a similar process which gave an opportunity to the US dollar to become the primary foreign reserve currency in the world. It is true that the sterling lost its position as a popular mean of trade as a result of the devastating WWII and the so-called Breton Woods II system. However, it is important to recognize every chance for a shift in the basic terms upon which international economic relations are founded.
It is a good time to look at what the Economist magazine says about this situation. Many people are watching for the FED’s announcement right in this moment because they are concerned about their stocks which would most probably shoot up as Mr Bernanke decides to move the target rate to a quater point lower position (4.25) Nonetheless, none of these people with lots of money in the stock market and a strong confidence in the real value of the ‘greenback’ is thinking about China and Japan. Each of the two Asian industrial giants have more than a trillion of $ in foreign currency reserves in their vaults and in the same time their own currencies are linked to the US dollar through a lot of bonds and US government securities bought by the Chinese and Japanese governments which keep the dollar high compared to both. That gives the two Asian countries a certain advantage in diplomatic negotiations but on the other hand hides a huge instability in case of more distressful world crisis. Look at the trend – USD against CNY.
