WAITING FOR SIGNOR DRAGHI
• The European Central Bank (ECB) unveils a bazooka and commits to unlimited sovereign bond purchases
• Recent data on housing activities and prices provide a positive surprise
• Latest data releases in the United States improve somewhat, but the recovery remains tepid
• The economic weakness was reflected in the disappointing August payrolls number, which increases the odds of another round of quantitative easing by the Fed
• Significant political risks remain, but so far, the US economy seems to have weathered the global slowdown—but has yet to pull out of its rut
• Equity markets remain addicted to central bank easing as disconnect with fundamentals remains
The Central Banks’ Hour: The annual three-day Jackson Hole pilgrimage of central bankers and monetary experts, which finished on August 31st, gained even more significance than usual this year. All eyes were on the Chairman of the Federal Reserve Bank, Ben Bernanke. Bernanke did not disappoint, coming up with a forceful defense of quantitative easing. Bernanke started by expressing dissatisfaction with the anemic pace of both economic growth and job creation. He further stated that studies showed that three rounds of asset purchases had added 3% to output growth and led to the creation of 2 million jobs. Bernanke added that the benefits of the “non-traditional” monetary policy followed by the Fed outweighed its costs; that these costs were manageable; and that they should be pursued further as warranted by economic conditions—a strong hint at a third round of quantitative easing (QE-III). The disappointing August employment report has increased the likelihood of such an intervention, although the Fed is not expected to announce a QE-III before the US elections on November 6th.
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