INVESTORS WEEKLY
SEPTEMBER 17th, 2012
   
     
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  Global Markets Outlook
August 2012
 
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“The Federal Reserve has done, and will continue to do, everything possible within the limits of its authority to assist in restoring our nation to financial stability…” Ben Bernanke, February 2009

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro…believe me, it will be enough.” Mario Draghi, July 2012

A decisive statement by European policymakers, in this case European Central Bank (ECB) President Mario Draghi, has the potential to be an important inflection point in Europe’s sovereign debt crisis and recession. But official comments have lacked the authoritative tone required to alert investors that the euro project will survive at least in some form (i.e., perhaps without Greece) and that the ECB will buffer the deflationary shock hitting the eurozone.

At face value, Draghi’s comments look to be strikingly similar to remarks made by US Federal Reserve Board Chairman Ben Bernanke back in February 2009. In December, the Fed cut its federal funds target rate to essentially zero; this move came shortly after the Fed began expanding its balance sheet during its first phase of quantitative easing (QE1). Bernanke’s February 2009 comments went a long way to reassuring the markets and the public that the Fed would act within its power to provide a firewall against deflation risks.

As said in previous Global Market Outlooks, it is absolutely essential for European policymakers to take steps to reduce the punishing borrowing rates faced by Italy and Spain as well as to sever the link between banks and the sovereign.

 

 

 

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Global Markets Outlook - August 2012
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