James Bullard, who heads the St. Louis Fed, has suggested that
sticking with bond purchases for a few more months would give
policymakers time to assess a deteriorating inflation outlook.
That helped markets to calm from a violent sell-off 10 days ago but
economists expect the Fed to turn off its money taps on schedule on
Wednesday, while giving accompanying assurances that it will respond
if a global downturn threatens its economy.
"We remain optimistic that the recent upshift from 2 percent to 3
percent growth will be sustained," economists at Bank of America
Merrill Lynch said in a note.
It may well be that the Fed keeps U.S. interest rates virtually at
zero for longer given tumbling energy prices and an absence of wage
growth. Investors have already pushed expectations for an initial
rate rise back several months to late next year.
Global concerns are centered on the extent of China's slowdown and
the malaise in the euro zone, over which the specter of deflation
Results of stress tests on European banks, announced on Sunday,
showed 25 banks had failed as of the end of 2013 but most have since
repaired their finances.
The European Central Bank has staked its reputation on this
exercise, hoping it will draw a line under years of financial and
economic turmoil. But whether it leads to a resurgence of bank
lending is uncertain given the euro zone's economic doldrums.
"Thinking that lending somehow can lead GDP is an illusion, and I
donít know how that has somehow crept into the policy debate," said
Erik Nielsen, chief global economist at Unicredit.
"Businesses need to believe in an increase in the demand for their
products before asking for credits, and now that external demand
growth is no longer there, this is when the euro zone needs demand
Euro zone inflation data in the week to come will show whether the
threat of deflation has eased at all. The consensus is for the
headline rate to have edged up to 0.4 percent in October but that
will bring little comfort.
Germanyís Ifo sentiment survey will give a glimpse of how things are
going for Europeís largest economy in the last three months of the
year. It contracted in second quarter and is unlikely to have done a
lot better in the third.
ECB'S SHOULDER TO THE WHEEL
The ECBís three-pronged plan to push money into the faltering
economy involves offering banks new cheap long-term money on the
condition that they lend it on, coupled with purchases of covered
bonds and asset-backed securities.
Reuters exclusively reported last week that the ECB may also buy
corporate bonds but there is no certainty that the combined effort
will do enough to lift growth and inflation.
[to top of second column]
Full-on quantitative easing of the sort the Fed is now winding up
remains politically difficult to countenance.
On Monday the ECB will announce how many covered bonds, which are
backed by high-quality assets so holders may be reluctant to give
them up, it bought in its first week in the market.
The euro malaise has intensified a debate about debt-cutting over
The European Commission has until Wednesday to decide whether to
throw back France's draft 2015 budget after Paris said it would not
meet EU deficit limits until 2017.
Paris has said it will not accept demands for deeper cuts than
already planned. Italy is making a similar case.
The hope is that a renewed French and Italian commitment to economic
reforms will persuade Germany to loosen its purse strings and the
ECB to act more forcefully.
But Germany continues to rebuff suggestions that it should increase
public spending and insists it will balance its budget next year for
the first time since 1969 despite the fact it is flirting with
People familiar with its deliberations said the Bank of Japan, which
has tried for two decades to banish deflation, will resist pressure
at this week's policy meeting for more stimulus measures or to
accept that its inflation target is unrealistically high.
It is preparing to roughly halve its 1 percent economic growth
forecast for this fiscal year, but will stick to its prediction that
inflation will hit its 2 percent target in the year from next April.
Having spent $15 billion of its reserves trying, and largely
failing, to underpin the rouble, Russia's central bank faces a
difficult policy decision on Friday.
There is growing speculation it may soon raise rates to support the
rouble, which is being hit by plunging oil prices and Western
sanctions imposed over the Ukraine crisis.
(editing by David Stamp)
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.