Tags: Markets | Plunge | Fed | Act

Experts: Markets Might Plunge 'a Few Percent' if Fed Doesn’t Act

Tuesday, 31 Jul 2012 08:31 AM

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The Federal Reserve is meeting to discuss monetary policy and should the U.S. central bank make no hints at any need for stimulus, stock markets could tank, analysts said.

Monthly jobs reports have disappointed, while consumer spending and other key economic indicators have been weakening as well, prompting many to believe the Fed will feel compelled to stimulate the economy with tools such as quantitative easing.

Quantitative easing — the technical term for printing money out of thin air — is a monetary measure where the Fed buys bonds held by banks, injecting the economy full of liquidity in a way that pushes down interest rates to encourage investing and hiring, pumping up stock prices in the process.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

However, while Fed officials have said such tools remain on the table, they've also said it's up to Congress and the White House to take the lead with fiscal reforms such as tax and spending adjustments to get the economy going again.

The European Central Bank meets this week as well, and talk of monetary authorities prepping similar measures there has sent stock prices climbing.

“I think we can expect quite a few percent being knocked off some of these indices,” said Sean Darby, chief global equity strategist with Jefferies Hong Kong, according to CNBC.

“It’s going to be all talk, no action.”

Stocks could dip by “a few percent” if monetary authorities remain quiet on the subject, Darby added.

Meanwhile in Europe, Germany, the continent's paymaster, has expressed reticence to rolling out monetary stimulus measures, arguing such tools allow debt-ridden countries to side-step making politically painful economic reforms like spending cuts.

Others agree, adding that in the United States, interest rates are already low, and considering that Fed stimulus measures work buy pushing borrowing costs down, further action won't do much.

"The markets will presumably go right back (down) again, and go back even further on the basis that there's all talk, there’s no action," said Richard Jerram, chief economist of the Bank of Singapore, CNBC added.

“So I think they need to deliver something.”

Others agree that while monetary stimulus measures carry diminishing returns, central banks may feel compelled to act anyway, at least to put a stopper in their economies to stave off decline.

“It’s not obvious central banks have been effective, but they’re going to keep trying,” said John Stopford, head of fixed income at Investec Asset Management in London, whose company oversees about $98 billion, according to Bloomberg.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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