Fed measures and signs of a new rally

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US Federal Reserve (Fed) Chairman Ben S. Bernanke. Photo – Brooks Kraft/Corbis

Asian stocks made some slow advances for the third day in a row which had started last Friday. The cut in the key interest rates in South Korea and Japan is still having its effect on the markets and there seems to be a new wave of optimism amongst the market participants. The reason for this optimism is due to the actions that have been taken throughout the last week and now with the announcement from the Fed expected soon, there seems to be signs of a new rally in the making. The move will get more momentum as the expected retail data from US is anticipated to be low. There are already calls in the halls of the FOMC to take an action and put pressure on Ben Bernanke, Federal Reserve Chairman, to do something.

His peers in South Korea, Brazil and Japan have already enacted expansionary measures at the cost and risk of inflation and the dismal economic data needs to be stemmed and corrected as soon as possible. A hint has already been dropped by other Fed leaders over an expected stimulus to take place. The movement has been apparent in both capital and commodity markets. Oil has been gaining steadily for the last week and that has bled into this week as well. Gold is also seeing strengthening supports and is expected to remain strong due to the expansionary measures to be put in place by the Fed. Expansion would induce inflation to stimulate growth and gold acts as an efficient hedge against any such price movements.

Today sees the delivery report in Congress by the Fed Chairman on the economy and the monetary policy which will highlight the dismal performance in the US complimented by Monday’s retail figures. This has only increased calls for more measures to be taken. In addition, the damage in the corn sector that has been caused by the drought is expected to raise food costs as well.

The doom and gloom does not end here as IMF has been correcting most of the growth rates for countries as well which has further damaged the market sentiment throughout. The fall in rates is down to euro zone crisis and the growth slowdown in former robust economies of China and India. The minutes released of the 19th and 20th June FOMC meeting shows that there is concern regarding a need for a stimulus and that the key measures under consideration are bond and asset purchases. There was also an urgency regarding a measure to be put in place to slow down the decline in the economy.

The growth rate of US itself has gone through downward revisions and Bernanke has said that based on the employment rate, additional asset purchases may be warranted. The 2008-2011 era has been a period of quantitative easing and now there is an expectation to replace short term treasuries with long term debt. This will not only open the programme to a wider investor base; but also increase the exposure of the government over a longer period of time. The extended maturity will aid the US to make flexible decisions for its future rather than be restricted by a short term deadline.

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