Thursday, June 21, 2012

Economy: Wait And See

As I surfed the Internet about comments on yesterday´s Fed decision I found conflicting responses. The blog "Calculated Risk" wrote: "Bernanke Paves the Way for QE3 on August 1" (  Quite to the contrary the blog "Califa Beach Pundit" commented: "No more quantitative easing is a good thing"" (

It looks like the Fed delivered something for everyone, including the "we-need-more-economic-stimulus" faction as well as the "we-have-already-sufficient-stimulus" group. The U.S. central bank announced that they will continue their asset buying program to keep interest rates low (operation twist), but they declined to take additional measures and to pour much more money into the economy  (Quantitive Easing or QE3). No wonder that the stock market closed yesterday almost unchanged.

I am in the camp of "no further stimulus needed" (you can find a thoroughrationale here Yes, the economy is cooling. So what? The job market is still healing as the weekly jobless claims prove, which are way beyond the numbers from last summer ( and the U.S. service sector, which dominates the economy, is still growing at a solid pace. The blog "Sober Look"" refers to the solid growth of bank loans which makes a further stimulus unnecessary ( And the Conference Board reported today that its Leading Economic Index (LEI) increased 0.3% in May to a four-year high of 95.8, following a 0.1% decline in April, and a 0.2% increase in March.

I reckon therefore that the monetary policy does enough for the moment and another stimulus program could be counter-productive. If the Fed would pour more money into the economy this could rekindle the commodity speculation and drive the prices of oil and other commodities northwards. A rally of oil and other commodities would again suck a large part of the additional fed money out of the economy and slow down the healing process.

But you never know. If the pessimists are right and the economy cools further in the coming weeks than the Fed could turn the heat on as soon as August. Therefore their wait and see approach is the best move they can make now.

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