It will be interesting to see how central banks respond to renewed concerns about Europe and the global economy, with some observers arguing that the European Central Bank in particular needs to step into the fray. However, the U.S. Federal Reserve releases its monetary policy on Wednesday, so it might be the first to give some indication of what policies are needed to help battle some pretty scary scenarios.
Ed Yardeni of Yardeni Research mentioned possible central bank responses in his note to clients on Monday morning – before the latest bout of turbulence shook things up. He was mentioning them in the context of giving stocks another boost, in the hope of extending October's stock market rally to the end of the year, but hey, a rescue operation might be even more appropriate.
For the ECB, he thinks a rate cut is in order, given that European economies appear to be sliding into recession: "Incoming ECB President Mario Draghi may not want to lower the bank's official interest rate at his very first meeting as the head of the bank on Thursday," he said. "But he could signal a cut is coming at the December meeting."
For the Fed, interest rates are as low as they can go, but could the central bank make noises about another round of quantitative easing (printing money to buy bonds)?: "The minutes of the September 20-21 FOMC meeting, which were released on October 12, suggested that QE-3.0 is still on the table: 'A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.' This was not mentioned in the statement released right after that last meeting of the FOMC. I will not be surprised if it is mentioned in the statement following Tuesday's meeting."
And don't forget about China. The central bank isn't expected to do anything this week, but it is probably done with tightening monetary conditions and could start easing again soon: "On October 26, Chinese Premier Wen Jiabao said that economic policy will be fine-tuned as needed, and that the Ministry of Industry and Information Technology said it is studying 'stimulative policies' for smaller companies as a global slowdown threatens growth."
David Berman