Markets Expect Bold Action from Central Banks This Week: Will Draghi Unleash His Bazooka?
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As the global economy continues its slow decline, all eyes are fixed on the trifecta of central bank meetings this week, including policy statements from the Federal Reserve, the European Central Bank and the Bank of England.
Market expectations were heightened last week after reports hinted that the Fed could act sooner rather than later and ECB president Mario Draghi would do whatever it takes to save the Euro.
Markets rallied last week after Draghi's euro zone comments. The Dow Jones Industrial Average (DJI) crossed the 13,000 mark last Friday for the first time since early May. The Dow ended last week up 1.97 percent and the S&P 500 (GSPC) gained more than 2.5 percent for the week.
Up first is the Federal Reserve, which will make its policy announcement on Wednesday.
"I don't think many people are counting on QE3, per se, but they are at least counting on some sort of strong hint from the Fed that something is coming down the pike," says Reuters economics reporter Pedro da Costa. "One way that they could do that is to potentially push back their guidance for when rates are eventually moving up."
The Fed has reiterated its interest rate stance several times this year. Rates will remain low until late 2014 and some Fed watchers believe the Fed could delay a rate hike until late 2015, keeping "the market on tenterhooks until potential action in September," says da Costa.
If that's the case, many wonder what else is left in the Fed's toolbox to unveil in September. Testifying before Congress earlier this month, Bernanke signaled plenty. But da Costa is not so sure. The Fed has completed two rounds of QE and has already extended Operation Twist through the end of the year.
"They like to have a long list so at least it looks like there is a lot left to do, but there is not that much," he says, refuting the idea that the Fed would follow in Europe's footsteps to charge banks for keeping reserves with the central bank — currently banks are paid a nominal fee to keep extra deposits with the Fed, rather than lending it. "I think the first order of business would be additional bond purchases."
Both the ECB and BOE will release their policy prescriptions Thursday. Perhaps even more important than the Fed announcement will be the outcome of the ECB meeting after Draghi's bold comments last week.
"He's going to have to deliver something this week in order for their not to be another round of sell-offs in European bond markets," says da Costa. Will the ECB go down the road of bond purchases like the Fed? "Draghi's bazooka so to speak?," quips da Costa. "We'll have to wait and see for Thursday."
Bottom line: High expectations are built into all three central bank meetings this week, but the big question remains: Will they deliver?
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