Monday 19th September 2011
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When Ben Bernanke decided that this week’s meeting of U.S. Federal Reserve policy committee should last two days instead of one, it was a signal.
Bernanke knew. He could have bet that Europe’s debt crisis would be unresolved. It is. He could have bet that long-term U.S. bond yields would be hovering near record lows. They are. And he could have bet that equity markets would be volatile.
It’s no surprise then that global investors are looking for Bernanke to call it as he sees it. Despite being maligned in some quarters, Bernanke has proven true to his word.
The test this week is what and how much more the Fed will do in a bid to break the pessimism that has enveloped the financial markets.
The consensus is that the FOMC will agree, though perhaps not unanimously, that it’s a good time to shift the maturity mix of the Fed’s trillion-dollar portfolio into the mid-term. The action is unlikely to be dramatic. The action is intended to give investors pause about betting too strongly one way or the other.
In essence, it’s the ability of the Fed to influence market sentiment that remains a key tool in its box.
“In times like these, people want guidance, and they want to hear what the Fed’s thinking,” David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, told Bloomberg.
At the August meeting of the FOMC, the decision was made to say that the Fed’s key interest rate would be held at its current low level for two more years. In his most recent speech, 11 days ago, Bernanke made it clear that there’s no easy fix to the challenges for the world’s biggest economy.
On tap this week are a slew of housing statistics, including sales of existing homes, housing starts and building permits. In addition the Conference Board will release its index of leading indicators. But investors need to be still more patient.
Housing "is dead and it will stay dead," Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey, told Reuters.
The outlook though isn’t necessarily all bleak. Homebuilder Lennar Corp., Nike Inc., General Mills Inc., Adobe Systems, Red Hat Inc. and Oracle Corp. have the potential with earnings reports this week to provide glimmers of hope. FedEx Corp. too.
Of course Europe, in particular Greece, can throw a fresh wrench into the mix.
Greek Prime Minister George Papandreou cancelled a weekend visit to the US and returned home as his Euro Zone partners increase pressure on his government to enact even tougher austerity measures.
Greece is finding it increasingly hard to dodge the d-word: default. It almost seems inevitable that a default of some degree is going to happen. This week Greek officials will resume talks with EU and IMF inspectors, Reuters says, who will judge fiscal progress before releasing the next 8 billion euro loan tranche in October.
What Greece can do, how much the government is prepared to do and what its Euro Zone partners are willing to accept has yet to be determined.
For now, the ball is in Bernanke’s court. And, he knows it.
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