A surprise reaction to Federal Reserve monetary stimulus
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Steve Chiotakis: Why all the sudden pessimism? In the Fed’s analysis, it said the economy stinks, yeah. Slow growth? Check. The abysmal housing market here in the U.S.? Check. No jobs? Check.
But what about the Fed’s response? Why aren’t markets bouncing back with news that the Fed
is using tools not seen since the 1960s to reignite the recovery?
The BBC’s Andrew Walker is with us from London with the latest on that. Hi Andrew.
Andrew Walker: Hi there, Steve.
Chiotakis: Why the big global reaction to the Fed’s decision?
Walker: It is slightly curious in some ways, because of course what the Fed is doing is taking action to stimulate the rapidly lagging economy recovery. So in some circumstances, the markets might well be expected to take that positively. This time, however, I think partly they’re focused on the Fed’s negative comments — the warning about significant downside risks. Also, I think there is an increasing feeling that, although central bank action is probably — at the very least — harmless, there’s an awful concern brewing, I think, that maybe they are beginning to run out of effective tools. And so, the Fed’s action, I think, is just made markets focus on that downside. There’s been a few other little bits of bad news — particularly some manufacturing data out of China — but I think it’s the Fed, and implications that the markets see from the statement, that is really focusing their minds.
Chiotakis: Andrew, we already knew that the economy isn’t doing very well, right?
Walker: Yeah, abosultely. You might well say, “Why on earth did the markets need the Fed to tell them that there are significant downside risks?” That they should have worked that out already — and I think they did. But we’re into this kind of environment where an awful lot is dependent on sentiment — perhaps more than is usually the case. And so, you do sometimes get markets responding in a perhaps rather unexpected way. And I think that’s what we’ve had this time.
Walker: I think probably yes. We’ve already had an indication a few hours before the Fed’s latest move from the Bank of England that it’s very seriously considering doing something. The European Central Bank is a little bit further behind on this kind of issue, because it has actually been raising interest rates in the last few months. But the odds, I think, must be increasing very rapidly that the European Central Bank will reverse those moves before very long.
Chiotakis: The BBC’s Andrew Walker in London. Andrew, thank you.
Walker: My pleasure, Steve.