We’re going to do it…We’re going to do it…We’re not going to do it…Yet.
Last week, the U.S. Federal Open Market Committee gave stock markets a gift that, on a scale of thrills, might have been on par with Marilyn Monroe singing happy birthday to JFK. On Wednesday, the FOMC announced (without a trace of breathiness):
“Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labour market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”
The ensuing euphoria pushed many of the world’s stock markets higher. The U.S. Dow Jones Industrial Average set a new record, Germany’s DAX closed at a new high, and Japan’s Nikkei delivered its best performance in eight weeks. Emerging markets also reaped positive benefits.
The Quantitative Easing or QE-sugar buzz abated when St. Louis Fed President James Bullard told Bloomberg the Fed may decide to begin buying fewer bonds at its next meeting in October. This surprised some as analysts already had predicted it wouldn’t happen until December which caused markets to slump a bit last Friday.
It’s possible that, by mid-October, the Fed’s ‘lather-rinse-repeat’ commentary on quantitative easing may have become background music for another event that has the potential to deliver a macroeconomic jolt: the U.S. congressional debate over the debt ceiling.