Sunday, November 7, 2010

U.S Fed actions meet expectations, spark market rally and generate criticism

On Wednesday 3, the Federal Open Market Committee (FOMC) - a 12-member group of U.S. Federal Reserve members, announced that it would pump an addition $600 billion to the market to help improve the US economy. This action by the Fed had been anticipated since mid August. While many global markets rallied on this announcement, the news received mixed reviews internationally. Perhaps the harshest comments, presented in the Financial Times and Der Spiegel, come from Germany’s Finance Minister Wolfgang Schäuble who describes US policy as “clueless”, that its actions “increase the insecurity in the world economy” and “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their printing press”.

MY TAKE: Perhaps the more things change, the more they remain the same. In 1971, when responding to criticisms about US effort to devalue the dollar, then US Secretary of the Treasury John Connolly told global finance ministers “the dollar is our currency, but your problem”. If this view remains true today, conventional wisdom suggests that the Fed’s actions should continue to drive equity and commodity prices higher while driving the US dollar lower against most major currencies. However, these are not conventional times and global economic uncertainty remains. At a minimum, investors should assess how much of the “good news” has already been priced into the market since mid August, when markets started to move higher. Note: As G20 leaders meet in Seoul, South Korea this week, perhaps we will learn if Mr. Connolly’s comments remain applicable in today’s environment.

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